Docstoc

Skype S-1 - IPO Filing

Document Sample
Skype S-1 - IPO Filing Powered By Docstoc
					Registration Statement on Form S-1                                                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...



           S-1 1 ds1.htm REGISTRATION STATEMENT ON FORM S-1

           Table of Contents

                                                                 As filed with the Securities and Exchange Commission on August 9, 2010
                                                                                                                                                                                         Registration No. 333-




                                                                                                 Washington, D.C. 20549




                                                                                                  UNDER
                                                                                         THE SECURITIES ACT OF 1933



                                                                                                  (to be converted into Skype S.A.)
                                                                                         (Exact name of Registrant as specified in its charter)

                                      Luxembourg                                                                      7372                                                            Not applicable
                               (State or other jurisdiction of                                           (Primary Standard Industrial                                                  (IRS Employer
                              incorporation or organization)                                             Classification Code Number)                                                Identification Number)

                                                                                              22/24 Boulevard Royal, 6e étage,
                                                                                                    L-2449 Luxembourg
                                                                                                      +352 2663-9130
                                                    (Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

                                                                                                            Skype Inc.
                                                                                                       160 Greentree Drive
                                                                                                         Suite 101, Dover
                                                                                                             DE 19904
                                                                                                          (302) 674-4089
                                                             (Name, address, including zip code, and telephone number, including area code, of agent for service)
                                                                                                                Copies to:
                              Richard C. Morrissey                                                     Neal D. Goldman                                                         Kevin P. Kennedy
                                David B. Rockwell                                              Chief Legal and Regulatory Officer                                       Simpson Thacher & Bartlett LLP
                            Sullivan & Cromwell LLP                                                   Skype Global S.à r.l.                                                   2550 Hanover Street
                                1 New Fetter Lane                                               22/24 Boulevard Royal, 6e étage,                                           Palo Alto, California 94304
                           London England EC4A 1AN                                                    L-2449 Luxembourg                                                          (650) 251-5000
                                 +44 207 959-8900                                                       +352 2663-9130

                 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the Registration Statement.

                  If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
                  If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the
           earlier effective registration statement for the same offering. ¨
                  If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration
           statement for the same offering. ¨
                  If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration
           statement for the same offering. ¨
                  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
           “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
           Large accelerated filer             ¨                                                                                                                                        Accelerated filer                        ¨
           Non-accelerated filer               x (Do not check if a smaller reporting company)                                                                                          Smaller reporting company                ¨

                                                                                             CALCULATION OF REGISTRATION FEE
                                                                                                                                                                         Proposed Maximum
                                                                    Title of Each Class of Securities                                                                    Aggregate Offering
                                                                           to be Registered(1)                                                                                Price (2)(3)                  Registration Fee
           Ordinary shares, par value $0.01 per ordinary share                                                                                                               $100,000,000                        $7,130
           (1)   A separate registration statement on Form F-6 is being filed for the registration of American depositary shares issuable upon the deposit of ordinary shares registered hereby. Each American depositary
                 share represents           ordinary shares.
           (2)   Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
           (3)   Includes ordinary shares represented by American depositary shares that the underwriters may purchase to cover over-allotments, if any.

                 The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which
           specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall




1 of 341                                                                                                                                                                                                              8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                       http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...


           become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




2 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




           Table of Contents

           The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration
           statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities
           and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

                                                                               Subject to Completion
                                                                    Preliminary Prospectus dated August 9, 2010

           PROSPECTUS

                                                                        American Depositary Shares
                                                                    representing     Ordinary Shares




                                                                                   Skype S.A.

                 This is the initial public offering of          American depositary shares, or ADSs, each representing ordinary shares of Skype S.A., a joint stock
           company (société anonyme) existing under the laws of the Grand Duchy of Luxembourg. We are offering              ADSs to be sold in this offering, and the
           selling shareholders identified in this prospectus are offering an additional       ADSs. We will not receive any proceeds from the sale of the ADSs to
           be offered by the selling shareholders.

                 Prior to this offering, there has been no public market for our ADSs or our ordinary shares. It is currently estimated that the initial public offering
           price per ADS will be between $             and $       . We plan to file an application to list our ADSs on The Nasdaq Global Select Market under the
           symbol                .

                 Investing in our ADSs involves a high degree of risk. See “Risk Factors” beginning on page 23 of this prospectus.


                Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities nor
           passed upon the accuracy or adequacy of the disclosures in the prospectus. Any representation to the contrary is a criminal offense.

                                                                                                                                                           Per ADS        Total
           Initial public offering price                                                                                                                  $           $
           Underwriting discounts and commissions                                                                                                         $           $
           Proceeds, before expenses, to Skype S.A.                                                                                                       $           $
           Proceeds, before expenses, to the selling shareholders                                                                                         $           $


                 To the extent that the underwriters sell more than        ADSs in this offering, the underwriters have an option for        days to purchase up to an
           additional         ADSs from the selling shareholders at the initial public offering price, less underwriting discounts and commissions.

                 The underwriters expect to deliver the ADSs against payment in New York, New York on                    , 2010.



           Goldman, Sachs & Co.                                                      J.P. Morgan                                                         Morgan Stanley
           BofA Merrill Lynch                             Barclays Capital              Citi                 Credit Suisse                             Deutsche Bank Securities
                              Lazard Capital Markets                                  RBC Capital Markets                                       UBS Investment Bank
                                              Allen & Company LLC                                                                  Evercore Partners

                                                                         Prospectus dated                   , 2010




3 of 341                                                                                                                                                              8/9/2010 8:37 AM
Registration Statement on Form S-1   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




           Table of Contents




4 of 341                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




           Table of Contents




5 of 341                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




           Table of Contents




6 of 341                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




           Table of Contents

                                                                             TABLE OF CONTENTS

                                                                                                                                                                       Page
           Prospectus Summary                                                                                                                                            1
           Risk Factors                                                                                                                                                 23
           Forward-Looking Statements                                                                                                                                   64
           Market Data                                                                                                                                                  65
           Use of Proceeds                                                                                                                                              66
           Corporate Reorganization                                                                                                                                     67
           Dividend Policy                                                                                                                                              69
           Capitalization                                                                                                                                               70
           Dilution                                                                                                                                                     72
           Selected Financial Data                                                                                                                                      74
           Unaudited Pro Forma Condensed Consolidated Financial Information                                                                                             83
           Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                        86
           Business                                                                                                                                                    130
           Management                                                                                                                                                  165
           Executive Compensation                                                                                                                                      174
           Certain Relationships and Related Party Transactions                                                                                                        193
           Principal and Selling Shareholders                                                                                                                          200
           Description of Share Capital                                                                                                                                203
           Description of American Depositary Shares                                                                                                                   211
           Comparison of Shareholder Rights                                                                                                                            219
           Shares Eligible for Future Sale                                                                                                                             233
           United States and Luxembourg Income Tax Considerations                                                                                                      235
           Underwriting                                                                                                                                                244
           Validity of Securities                                                                                                                                      248
           Experts                                                                                                                                                     248
           Where You Can Find More Information                                                                                                                         248
           Index to Consolidated Financial Statements                                                                                                                  F-1

                 Neither we, the selling shareholders nor the underwriters have authorized anyone to provide you with information that is different from that
           contained in this prospectus or with any other information, and neither we, the selling shareholders nor the underwriters can assure you that
           information extrinsic to this prospectus (and any free writing prospectus prepared by us in connection with this offering) is reliable. We are
           offering to sell, and seeking offers to buy, our ADSs only in jurisdictions where offers and sales are permitted. The information contained in this
           prospectus is accurate only as of the date on the front cover of this prospectus, or other date stated in this prospectus, regardless of the time of
           delivery of this prospectus or of any sale of our ADSs.

                  Until               (25 days after commencement of this offering), all dealers that buy, sell, or trade our ordinary shares, whether or not participating
           in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when
           acting as underwriters and with respect to their unsold allotments or subscriptions.

                 No action has been or will be taken in any jurisdiction by us, the selling shareholders or any underwriter that would permit a public offering of our
           ADSs or the possession or distribution of this prospectus or any free writing prospectus prepared by us in connection with this offering in any jurisdiction
           where action for that purpose is required, other than the United States. Persons outside the United States who come into possession of this prospectus or
           any such free writing prospectus must inform themselves about and observe any restrictions relating to the offering and sale of our ADSs and

                                                                                           i




7 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




           Table of Contents

           the distribution of this prospectus and any such free writing prospectus outside the United States. Unless otherwise expressly stated or the context
           otherwise requires, references in this prospectus and any such free writing prospectus to “dollars” and “$” are to United States dollars and to “EUR” and
           “€” are to euro.

                 This prospectus has been prepared on the basis that all offers of ADSs will be made pursuant to an exemption under the Prospectus Directive, as
           implemented in Member States of the European Economic Area, from the requirement to produce a prospectus. Accordingly, any person making or
           intending to make any offer within the European Economic Area of ADSs which are the subject of the placement contemplated in this prospectus should
           only do so in circumstances in which no obligation arises for us or any of the underwriters to produce a prospectus for such offer. Neither the Company nor
           the underwriters have authorized, nor do they authorize, the making of any offer of ADSs through any financial intermediary, other than offers made by the
           underwriters which constitute the final placement of ADSs contemplated in this prospectus.

                  In the United Kingdom, this prospectus is for distribution only to persons which (i) have professional experience in matters relating to investments
           falling within article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”), (ii) are persons
           falling within article 49(2)(a)-(d) of the Order (high net worth companies, unincorporated associations, etc.), or (iii) other persons to whom it may
           otherwise lawfully be distributed under the Order (all such persons together being referred to as “Relevant Persons”). This prospectus is directed only at
           Relevant Persons and must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment activity to which this
           prospectus relates is available only to Relevant Persons and will be engaged in only with Relevant Persons.

                                                                   ENFORCEMENT OF CIVIL LIABILITIES

                 We are a company organized under the laws of the Grand Duchy of Luxembourg. A substantial majority of our assets are located outside the United
           States. Furthermore, some of our directors and officers named in this prospectus reside outside the United States and all or most of the assets of those
           officers and directors may be located outside the United States. As a result, investors may find it difficult to effect service of process within the United
           States upon us or these persons or to enforce outside the United States judgments obtained against us or these persons in U.S. courts, including judgments in
           actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for an investor to enforce in U.S.
           courts judgments obtained against us or these persons in courts located in jurisdictions outside the United States. It may also be difficult for an investor to
           bring an original action in a Luxembourg or other foreign court predicated upon the civil liability provisions of the U.S. federal securities laws against us
           or these persons.

                 In particular, there is doubt as to the enforceability of original actions in Luxembourg courts of civil liabilities predicated solely upon U.S. federal
           securities laws, and the enforceability in Luxembourg courts of judgments entered by U.S. courts predicated upon the civil liability provisions of U.S.
           federal securities laws will be subject to compliance with procedural and other requirements under Luxembourg law, including the condition that the
           judgment does not violate Luxembourg public policy.

                                                                                          ii




8 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




           Table of Contents


                                                                          PROSPECTUS SUMMARY

                   This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should
             consider in making your investment decision. You should read this summary together with the more detailed information, including our historical
             combined and consolidated financial statements and the related notes, elsewhere in this prospectus. You should carefully consider, among other
             things, the matters discussed in “Risk Factors.” As used in this prospectus, “Skype Global” refers to Skype Global S.à r.l. (formerly Springboard
             Group S.à r.l. and formerly SLP III Cayman DS IV Holding S.à r.l.). Furthermore, as used in this prospectus, “Skype,” “Company,” “we,” “our,”
             “us” or “Successor” refer to Skype Global and its subsidiaries on a consolidated basis prior to the completion of our corporate reorganization
             and to Skype S.A. and its subsidiaries on a consolidated basis as of the completion of our corporate reorganization and thereafter. As used in this
             prospectus, “Predecessor” refers to the communications business segment of eBay Inc. (“eBay”), which consisted of the assets and liabilities of
             Skype Luxembourg Holdings S.à r.l. (“Skype Holdings”) and its affiliates, Sonorit Holdings A.S. (“Sonorit”) and Skype Inc. (collectively, the
             “Skype Companies”). On November 19, 2009, Skype Global acquired the Skype Companies from eBay (the “Skype Acquisition”).

                   In this summary and elsewhere in this prospectus, we sometimes refer to our pro forma results of operations. Unless otherwise expressly
             stated or the context otherwise requires, this pro forma data has been prepared on the basis described under “Unaudited Pro Forma Condensed
             Consolidated Financial Information” and is subject to the assumptions and uncertainties described in that section. We also sometimes refer to
             Adjusted EBITDA, which is a non-GAAP measure, in this summary and this prospectus. For a description of Adjusted EBITDA and a
             reconciliation of Adjusted EBITDA to net income, refer to “—Adjusted EBITDA” in this summary.

                                                                                 Our Company

                   Skype is a global technology leader that enables real-time communications over the Internet. Our software-based communications platform
             offers high-quality, easy-to-use tools for consumers and businesses to communicate and collaborate globally through voice, video and text
             conversations. During the first half of 2010, our users made 95 billion minutes of voice and video calls using Skype, video calls accounted for
             approximately 40% of all Skype-to-Skype minutes, and our users sent over 84 million SMS text messages through Skype.

                   Skype has grown rapidly to achieve significant global scale since we were founded in 2003. From June 30, 2009 to June 30, 2010, we grew our
             registered users from 397 million to 560 million. From the three months ended June 30, 2009 to the three months ended June 30, 2010, we grew our
             average monthly connected users from 91 million to 124 million and our average monthly paying users from 6.6 million to 8.1 million. See “Selected
             Financial Data—Key Metrics” for definitions of these metrics and their limitations. Although we have achieved significant global scale and user
             growth to date, the penetration of our connected and paying users is low relative to our market opportunity. It is our goal to continue to grow both our
             connected and paying users as Internet access proliferates globally and our penetration increases.

                   We believe the scale, global distribution and growth of our user base provide us with powerful network effects, whereby Skype becomes more
             valuable as more people use it, thereby creating an incentive for existing users to encourage new users to join. We believe that these network effects
             help us to attract new users and provide significant competitive advantages, such as strengthening our brand and enabling us to benefit from “viral”
             marketing, which provides us with a cost advantage by keeping our user acquisition costs low. In addition, our scale and network effects encourage
             other companies to form strategic relationships with Skype, creating more value for our users and increasing user engagement. For example, we have
             recently announced strategic relationships with leading mobile operators such as Verizon Wireless in the United States and with


                                                                                        1




9 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


              television manufacturers (LG, Panasonic and Samsung) that embed Skype software in their applications and devices. Strategic relationships like these
              help us make Skype present in more communications devices, which increases the accessibility and usage of Skype by our large and growing user
              base.

                     We believe our highly scalable peer-to-peer software architecture gives us a significant cost advantage compared to conventional
              communications networks because it utilizes our users’ existing Internet connections and does not require us to build or maintain a physical
              communications network. As a result, we can add new users and provide them with a wide range of communications tools at minimal incremental cost
              to us, allowing us to offer many of our products for free. We believe our low cost and highly scalable peer-to-peer software architecture positions us
              to grow in new regions faster and address opportunities more quickly than many other competitive offerings.

                    In the first six months of 2010, we generated $406.2 million of net revenues, and our Adjusted EBITDA was $115.8 million. While Skype-
              to-Skype voice, video and text conversations are free, our primary source of revenue, to date, has been from the purchase of credit (on a pay-as-
              you-go or subscription basis) for our SkypeOut product, which provides low-priced calling to landlines and mobile devices. Going forward, we plan
              to continue growing and diversifying our sources of revenue in four specific areas:
                     •    First, we believe that there is a significant opportunity to grow our user base.
                     •    Second, we believe that we can generate more communications revenue from our users by improving awareness and adoption of our paid
                          products and introducing premium products such as group video calling.
                     •    Third, we will continue to develop new monetization models for our large connected user base. We currently generate a small portion of
                          our net revenues through marketing services (such as advertising) and licensing, which we expect will grow as a percentage of our net
                          revenues over time.
                     •    Fourth, we will broaden our user base to include more business users. For example, we have recently released and will continue to
                          develop and market Skype for Business products that aim to capitalize on demand for Skype from small, medium and large businesses.
                                                                            Recent Developments

                     In November 2009, we were acquired from eBay by an investor group, led by Silver Lake and including the Canada Pension Plan Investment
              Board (CPPIB) and Andreessen Horowitz. In connection with the Skype Acquisition, eBay received a significant ownership stake in the Company, and
              Joltid also made an equity investment in the Company. We believe that our investor group includes a unique combination of investors and operators
              with specific domain expertise and skill sets, including Silver Lake, a leading large-scale global technology investor with extensive operating
              experience; CPPIB, an institutional investor with deep sector expertise, and Andreessen Horowitz, an Internet-focused venture capital specialist,
              together with the Internet experience of eBay and the Skype-specific and consumer-facing Internet knowledge of Skype’s founders.

                     Since the Skype Acquisition, we have continued to pursue our mission to be the worldwide communications platform of choice and have made
              significant improvements in our business. In particular, we have made significant investments in people and infrastructure, and we have continued to
              increase our user base, revenues and Adjusted EBITDA while adding new products and partnerships and further strengthening our capital structure.

                    Examples of our recent progress include:

              Acquisition of Intellectual Property
                     •    In November 2009, we acquired from Joltid the intellectual property rights to the technology that facilitates communications in the
                          peer-to-peer network of Skype users. We acquired this technology as


                                                                                          2




10 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                         part of a settlement that we and eBay reached with Joltid regarding our use of this peer-to-peer communication technology, in which all
                         outstanding litigation between the parties was resolved. Joltid also made an investment of $80 million in us. We refer to these matters
                         collectively as the “Joltid Transaction.”

              Increased Investment
                    •    People. We recruited several new executives to strengthen our senior management team, including, among others, a new Chief Financial
                         Officer, Chief Marketing Officer, Chief Legal Officer and a new Head of Skype for Business, and grew our number of employees and
                         contractors from 640 as of June 30, 2009 to 839 as of June 30, 2010.
                    •    Infrastructure. We have budgeted to invest approximately $37 million in capital expenditures in 2010, a substantial increase from $13.5
                         million in 2009. We are investing large amounts in a new SAP ERP system, for internal reporting and other control processes, and in
                         Human Resources systems to help us systematically attract, develop and manage our workforce. We are also investing to provide new
                         office infrastructure across multiple geographies to support our growth.

              Sustained Growth
                    •    Users, net revenues and Adjusted EBITDA. We have significantly increased both our free and paying users, growing our average monthly
                         connected users by 36% and average monthly paying users by 23%, from the three months ended June 30, 2009 to the three months ended
                         June 30, 2010. Net revenues increased by 25.1% from $324.8 million in the first six months of 2009 to $406.2 million in the first six
                         months of 2010 and Adjusted EBITDA increased by 53.9% from $75.2 million in the first six months of 2009 to $115.8 million in the first
                         six months of 2010.
                    •    Strategic relationships. We have launched several important commercial strategic relationships, including one with Verizon Wireless in
                         the mobile market in the United States and others in the consumer electronics market, such as arrangements with LG, Panasonic and
                         Samsung to embed Skype in certain HD televisions. More broadly, in July 2010, we released SkypeKit, a software development tool
                         designed to meet demand from independent software developers and consumer electronics manufacturers to incorporate Skype
                         functionality within their own applications and devices.
                    •    Products. We have released a significant number of new products, including:
                          •       Mobile. We have released Skype products on multiple platforms including iOS (iPhone), Blackberry, Linux, Android and
                                  Symbian.
                          •       Premium products. We have launched our group video calling product in a trial “beta” version of our Skype 5.0 for Windows
                                  client and announced that it will be available as part of a premium product.
                          •       Marketing services, including advertising. We have launched products that allow businesses to market their products or services
                                  selectively to our user base, including Click & Call, which enables users to initiate a Skype call from a website to participating
                                  businesses.
                          •       Skype for Business. We have launched our Skype for Business product offerings: Skype Manager, which allows businesses to
                                  manage Skype accounts for their employees, and Skype Connect, which allows businesses to connect their private telephone
                                  branch exchange (PBX) over the Internet to Skype’s peer-to-peer user network to achieve low-cost calling.

              Capital Structure
                    •    Financing. We raised $825 million face amount of debt to help finance the Skype Acquisition, consisting of $700 million face amount of
                         senior debt and a payment-in kind loan of $125 million from


                                                                                        3




11 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                          eBay. We refinanced our debt in February 2010. As part of this refinancing, we reduced our total debt and significantly lowered our cost
                          of debt by increasing our senior debt to a U.S. dollar equivalent $775 million face amount while repaying the eBay payment-in-kind note
                          in full. We also have a $30 million revolving credit facility.

                                                                                   Our Platform

                    The large and growing global market for communications and collaboration solutions is being transformed by the Internet. We believe that
              underlying market forces increasingly challenge the ways that communications have traditionally been provided and offer opportunities for innovative
              and disruptive solutions such as ours to help accelerate the transformation of the global communications industry. These market forces include a
              growing desire to communicate globally, increasing Internet penetration, expansion and diversification of the ways people communicate, and
              proliferation of Internet-connected devices. Furthermore, as the Internet transforms the ways that people communicate, new markets and business
              models are being developed, including social networking, advertising, social gaming and virtual goods. We believe that our large and engaged user
              base, combined with our easy-to-use, high-quality platform, position us well to compete in these markets over time as they evolve.

                    We have developed an innovative software-based communications platform that offers a simple and convenient way for our users to stay in
              touch virtually anywhere in the world. Skype users can have free voice, video and text conversations with other Skype users, or can call anyone with a
              landline or mobile phone number at a low cost. We believe that our platform is well-positioned to capitalize on the market forces that are transforming
              the global communications industry:
                     •    We facilitate global communication and collaboration. Our software platform is currently available in 29 languages, and we have an
                          extremely broad reach in countries throughout the world.
                     •    We leverage existing fixed and wireless Internet infrastructure. Our software platform only requires an Internet-connected device to
                          connect instantly with our global network of 124 million average monthly connected users (for the three months ended June 30, 2010) for
                          free, or with mobile and landlines around the world at a low price.
                     •    We offer numerous communication tools and ways to communicate and collaborate. In addition to voice and video calling, our software
                          platform also offers a variety of communication and collaboration methods, such as instant messaging, paid SMS messaging, screen
                          sharing and file transferring. Features are seamlessly tied together on the Skype platform, allowing our users to switch easily between
                          various ways of communicating and collaborating.
                     •    Skype is available on diverse Internet-connected devices. Because Skype is software-based, users can access their Skype account and
                          enjoy our software platform’s functionality from virtually any Internet-connected device. Skype is currently available, either pre-installed
                          or through user download, on desktops and laptops, as well as selected mobile phones, netbooks, tablets, televisions and video game
                          consoles.

                                                                           Our Competitive Strengths

                    We believe our solution and business model distinguish us from alternative providers and bring us a number of differentiated competitive
              strengths:
                     •    Large, growing and diverse global user base. Our user base is large and continues to grow rapidly and is geographically and
                          demographically diverse, as our software is used by people in countries throughout the world. Our software has broad global appeal and
                          is actively used by people across gender, age and income groups, helping everyone from business executives to grandparents to
                          schoolchildren stay connected.


                                                                                         4




12 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                    •    Strong network effects. We and our users benefit from network effects. Skype becomes more valuable as more people use Skype, thereby
                         creating an incentive for existing users to encourage new users to join. This results in viral marketing and lower marketing expense for
                         Skype.
                    •    Strong communications brand. Despite low levels of marketing spending by us to date, we believe that Skype is among the most
                         recognized brands in Internet communications, appealing to a broad range of people across diverse demographic groups and geographies.
                    •    Low cost and highly scalable peer-to-peer architecture. The peer-to-peer architecture created by our software platform connects our
                         users by utilizing their existing network and computing resources. This provides us with a significant cost advantage because we are not
                         required to build or maintain a physical communications network, such as a wire or fiber optic network or cellular infrastructure.
                    •    High-quality, multi-feature voice and video product suite. We offer a wide range of tools for our users to communicate and collaborate,
                         including voice and video calling, instant messaging, screen sharing and file transferring. For example, we recently introduced group
                         video calling in a trial “beta” version of our Skype 5.0 for Windows client, which allows our users to communicate with up to five other
                         users in a simultaneous video conversation. During the first half of 2010, approximately 40% of our Skype-to-Skype minutes were video
                         calls, which we believe demonstrates the high quality and utility of our video products.
                    •    Payment infrastructure. Because of our size and experience we have the ability to collect small payments in many countries around the
                         world. We currently accept payments in 15 currencies. We are able to accept multiple forms of payment, including PayPal, credit cards,
                         debit cards, by paying cash for a voucher and by transferring bank funds. Additionally, we have substantial experience addressing
                         fraudulent payment activity and have developed sophisticated anti-fraud practices and systems.
                    •    Software platform that is device and network agnostic. Unlike some competitive offerings, our platform is software-based and is
                         available across multiple devices and networks. Our software runs on virtually all major computer and mobile operating systems and on
                         multiple hardware platforms, including televisions and mobile phones, and across Internet and mobile telecommunications networks.
                    •    Attractive financial structure. We believe that our business benefits from an attractive financial structure. For example, our cash flow and
                         working capital are enhanced by the fact that users of our paid communications services products, including SkypeOut, pay us in advance
                         of their use of our products; and the growing popularity of our subscription-based products provides us with higher predictability
                         regarding our future revenues. We believe our business is also characterized by low operating and capital expenditures as a result of the
                         strong network effects that help us grow our user base, our strong communications brand, which we have built despite low levels of
                         marketing spending, and the low-cost peer-to-peer architecture that does not require us to build or maintain a network. Furthermore, we
                         have relatively low cash tax expense, expressed as a percentage of our income or loss before income taxes. This financial structure
                         provides us the opportunity to invest cash generated from our operating activities in the continued development of innovative products and
                         technologies with the objective of further improving and diversifying our portfolio of products.


                                                                                        5




13 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                 http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                                                                                                         Our Users

                    We believe that the growth and loyalty of our user base validate our competitive strengths. Our registered, connected and paying users have
              grown over time, which we believe is primarily attributable to the network effects of our users, our strong global brand and our differentiated
              technology and product offering. For a description of how we calculate each of our metrics, see “Selected Financial Data—Key Metrics.” The chart
              below highlights the growth in our users since 2007:




              (1)   Our registered user metric is difficult for us to verify and is subject to a degree of overstatement. For more information, see “Risk Factors—The number of our registered users overstates the
                    number of unique individuals who register to use our products.” Our registered user number includes users who registered through their MySpace account and excludes users that have registered
                    on Skype through our investment to address the Chinese market, Tel-Online Limited. For more information, see “Selected Financial Data—Key Metrics.”
              (2)   Our connected and paying user metrics are subject to uncertainties and inaccuracies and may be overstated or understated. For more information, see “Risk Factors—Our connected users metric is
                    subject to uncertainties and may overstate the number of users who actively use our products” and “—Our paying user and communications services billing minutes metrics are subject to a degree
                    of inaccuracy due to fraudulent transactions and our method of calculating these metrics.” Our average monthly connected and paying user numbers include users who registered through their
                    MySpace account and exclude users that have connected to Skype through our investment to address the Chinese market, Tel-Online Limited. For more information, see “Selected Financial
                    Data—Key Metrics.”

                    Since 2008, our connected users have increased rapidly due to the increasing popularity of our free products, including video calling, which
              represented approximately 40% of all Skype-to-Skype minutes for the first half of 2010. We view the growth in our connected user base as an
              opportunity to convert more of these connected users into paying users in the future.

                     Our paying users exhibit strong long-term loyalty as well as stable spending patterns over time, as demonstrated by our monthly pay-as-you-go
              billings data trends. For example, pay-as-you-go billings for users who first registered with Skype before 2008 were substantially the same in
              December 2009 as they were in December 2008.

                     Skype appeals to a geographically and demographically diverse range of users. People use Skype in a variety of different ways, from friends or
              relatives calling each other in different cities or countries, to grandparents video-calling their grandchildren, to teachers conducting classes remotely,
              to students text messaging each other or to business associates transferring files or screen-sharing. Our appeal is global, and our users correspondingly
              vary in age, gender and professional background. For example, for the three months ended


                                                                                                               6




14 of 341                                                                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


              June 30, 2010, connected users registered in the United States represented approximately 16% of our global average monthly connected users, while
              no other single country represented more than 7% of our average monthly connected users.


                                                                                   Our Strategy

                   Our mission is to be the communications platform of choice for consumers and businesses around the world. We believe we have a significant
              opportunity to grow our users, revenue and profitability by increasing the penetration of our user base, expanding their use of our free and paid
              products, and by developing new products and monetization models as the industry continues to evolve. Our strategy has four key components:
              1.    Continue to grow our connected and paying user base. In the three months ended June 30, 2010, we had 124 million average monthly
                    connected users and 8.1 million average monthly paying users. We aim to grow our user base and increase the portion of our users who use paid
                    products by supplementing our viral marketing with new marketing initiatives and strategic relationships.
              2.    Increase usage of our free and paid products and extend our relationship with our users. As our users continue to use Skype more often, they
                    begin to recognize the full benefits of using our products and many migrate to using Skype as their preferred communications tool across a
                    variety of connected devices. We seek to capitalize on this migration path and to grow usage of our free and paid products through multiple
                    initiatives, including improving our suite of free products, adding new features and paid products, increasing our users’ awareness of our paid
                    products and making it easier for users to pay. We also intend to promote our subscription products and to continue developing Skype software
                    for multiple platforms to increase the accessibility of Skype to our user base around the world.
              3.    Develop new monetization models, including advertising. Our users made over 152 billion minutes of Skype-to-Skype calls in the twelve
                    months ended June 30, 2010. We believe this represents a meaningful opportunity to increase our revenue from alternative monetization models,
                    including advertising, gaming and virtual gifts.
              4.    Broaden our user base to include more business users. We believe the business communications market represents a large opportunity for
                    Skype. Approximately 37% of over 40,000 of our connected users surveyed in the first quarter of 2010 told us that they use our product platform
                    occasionally or often for business-related purposes. We believe there is a significant opportunity to better serve the communications needs of
                    the small and medium enterprise segment, as well as larger enterprise customers, by focusing on user needs in this market and developing
                    additional products specifically tailored to business users.


                                                                          Risks Affecting Our Business

                    You should carefully consider the risks described under “Risk Factors” and elsewhere in this prospectus. These risks could harm our business,
              results of operations and financial condition materially and could cause the market price of the American Depositary Shares, or ADSs, representing
              our ordinary shares to decline and could result in a partial or total loss of your investment.


                                                                            Corporate Reorganization

                   Prior to this offering, we have conducted our business through Skype Global S.à r.l., a Luxembourg limited liability company (société à
              responsabilité limitée), and its subsidiaries. The registrant, Skype S.à r.l., a Luxembourg limited liability company (société à responsabilité limitée)
              was formed for the purpose of making this offering. Skype S.à r.l., currently a wholly-owned subsidiary of Skype Global S.à r.l., does not engage in
              any


                                                                                         7




15 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


              operations and has only nominal assets, including a 100% interest in Skype Global Holdco S.à r.l., a Luxembourg limited liability company (société à
              responsabilité limitée), which itself does not engage in any operations and holds no material assets. The corporate reorganization will involve, among
              other steps, the conversion of Skype S.à r.l. into a Luxembourg joint stock company (société anonyme), Skype S.A., and the acquisition of the shares
              of Skype Global S.à r.l. by Skype S.A., as further described in “Corporate Reorganization.” Investors in this offering will only receive, and this
              prospectus only describes the offering of, ADSs representing the ordinary shares of Skype S.A.

                                                                             Principal Shareholders

                   In November 2009, we were acquired by an investor group, led by Silver Lake and including the CPP Investment Board Private Holdings Inc.
              and Andreessen Horowitz. In connection with the Skype Acquisition, eBay received a significant ownership stake in the Company, and Joltid, which
              was founded by the original founders of Skype, also invested in the Company.


                                                                           Principal Executive Offices

                    Skype S.à r.l. was incorporated as a limited liability company (a société à responsabilité limitée) under the laws of the Grand Duchy of
              Luxembourg in July 2010 and will be transformed into a Luxembourg joint stock company (a société anonyme) becoming Skype S.A. as part of the
              corporate reorganization described under “Corporate Reorganization.” Skype Global S.à r.l., a Luxembourg limited liability company (a société à
              responsabilité limitée or “S.à r.l.”), was organized under the laws of the Grand Duchy of Luxembourg in September 2008. Our principal executive
              office is located at 22/24 Boulevard Royal, 6e étage, L-2449 Luxembourg, and our telephone number at this address is +352 2663 9130. Our website
              is www.skype.com. Information on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.

                    All of our activities are conducted through various subsidiaries, which are organized and operated according to the laws of their country of
              incorporation.

                    Skype, associated trademarks and logos (including SkypeIn, SkypeOut, Skype To Go, Skype Access, Skype Certified and SILK) and the “S”
              symbol are our trademarks. This prospectus also may refer to brand names, trademarks, service marks and trade names of other companies and
              organizations, and those brand names, trademarks, service marks and trade names are the property of their respective owners.


                                                                                        8




16 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                       http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                                                                               The Offering

              ADSs offered by us                                           ADSs

              ADSs offered by the selling shareholders                     ADSs (or                ADSs if the underwriters exercise their option to purchase
                                                                    additional ADSs in full)

              Ordinary shares outstanding immediately after this           ordinary shares (including ordinary shares represented by ADSs)
               offering

              Use of proceeds                                       We estimate that we will receive net proceeds of approximately $           million from the
                                                                    sale by us of ADSs offered in this offering, after deducting the underwriting discount and
                                                                    estimated offering expenses payable by us. We intend to use the net proceeds received by us
                                                                    in connection with this offering for general corporate purposes.

                                                                    Furthermore, in connection with the termination of the management services agreements with
                                                                    certain of our shareholders and their affiliates, we will pay approximately $         million to
                                                                    such counterparties, on the date of the consummation of this offering, using a portion of the
                                                                    proceeds of this offering. See “Certain Relationships and Related Party Transactions
                                                                    —Management Services Agreements.”

                                                                    We will not receive any proceeds from the sale of approximately $           million of ADSs
                                                                    to be offered by the selling shareholders. See “Principal and Selling Shareholders.”

              Dividend policy                                       We do not anticipate paying any cash dividends on our ordinary shares in the foreseeable
                                                                    future. We anticipate that we will retain all of our available funds for use in the operation
                                                                    and development of our business. See “Dividend Policy.”

              Proposed Nasdaq Global Select Market symbol for the
               ADSs

              The ADSs                                              Each ADS represents         ordinary shares. The ADSs may be evidenced by American
                                                                    depositary receipts, or ADRs.

                                                                    The depositary will be the holder of the ordinary shares underlying the ADSs and you will
                                                                    have the rights of an ADS holder as set forth in the deposit agreement among us, the
                                                                    depositary and holders and beneficial owners of ADSs from time to time.

                                                                    You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying
                                                                    your ADSs. The depositary will charge you a fee for that surrender.


                                                                                     9




17 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                                                                         We may amend or terminate the deposit agreement for any reason without your consent. If an
                                                                         amendment becomes effective, you will be bound by the deposit agreement, as amended, if
                                                                         you continue to hold your ADSs.

                                                                         See “Risk Factors—Risks Related to Our ADSs and this Offering” and “Description of the
                                                                         American Depositary Shares.”

              Depositary                                                 The Bank of New York Mellon

              Tax considerations                                         See “United States and Luxembourg Income Tax Considerations.”

                     The number of ordinary shares that will be outstanding immediately after this offering is based on ordinary shares outstanding on June 30, 2010,
              plus the        ordinary shares to be sold by us in the form of ADSs in this offering, and excludes the following ordinary shares:
                     •          ordinary shares issuable upon the exercise of stock options granted to our employees, directors, service providers and consultants
                           outstanding at June 30, 2010 under the Skype Global S.à r.l. Equity Incentive Plan (the “Skype Equity Incentive Plan”) with an exercise
                           price of $        per share;
                     •           ordinary shares issuable upon the exercise of stock options granted to our employees, directors, service providers and consultants
                           after June 30, 2010 under the Skype Equity Incentive Plan with an exercise price of $         per share;
                     •          ordinary shares reserved for future issuance under the Skype Equity Incentive Plan; for a discussion of the Skype Equity Incentive
                           Plan, see “Executive Compensation—Compensation Discussion & Analysis—Components of Executive Compensation—Long-Term
                           Equity Incentives”; and
                     •          ordinary shares into which warrants granted to Joltid Limited on November 19, 2009, which are now held by SEP Investments Pty
                           Limited, may be exercised at an exercise price of $         per share (the warrants expire upon the earlier of November 19, 2019 and the
                           occurrence of a reorganization event, as defined under the terms of the warrant). See “Capitalization—Warrants” for more information
                           regarding the terms of the warrant.

                    Unless otherwise expressly stated or the context otherwise requires, the information in this prospectus assumes:
                     •     no exercise of the underwriters’ option to purchase up to           additional ADSs from the selling shareholders;
                     •     the completion of our corporate reorganization pursuant to which Skype Global S.à r.l. will become an indirect wholly-owned subsidiary
                           of Skype S.A.; and
                     •     the adoption of our new articles of incorporation, which will occur prior to the closing of this offering.


                                                                                 Customer Allocation

                    We intend to make a portion of this offering available to our customers based on the nature and extent of their relationship with Skype. A Skype
              customer wishing to be considered for an allocation as a customer in the offering must have a brokerage account with an eligible broker and provide to
              the broker his or her Skype Name. Further details regarding customer participation will follow in a future prospectus.


                                                                                          10




18 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                                                                               Financial Overview
                   We believe that the growth and scale of our user base are primary drivers of our business. Our user base has grown rapidly since we were
              founded in 2003. From the three months ended June 30, 2009 to the three months ended June 30, 2010, we grew our average monthly connected users
              by 36%, from 91 million to 124 million.

                    The growth in our user base has translated into revenue growth. Our net revenues have historically been driven by the increasing use of our
              SkypeOut product, which enables Skype users to make low-priced calls to landlines and mobile devices on a pay-per-minute or subscription basis.
              Users of our paid communications services products, including SkypeOut, pay us in advance of their use of our products, and the growing popularity of
              our subscription-based products is providing us with more predictability of our future revenues.

                     Our primary costs associated with our net revenues are costs incurred by us to have SkypeOut calls connected, or “terminated,” on a landline or
              wireless network. As we have grown our business and entered into agreements with more telecommunications carriers to connect SkypeOut calls, we
              have been able to negotiate lower termination costs. As a result, cost of net revenues relating to our SkypeOut product has been increasing at a slower
              rate than our net revenues from the product, enabling us to improve our gross margin.

                   We believe our business is also characterized by low operating expenditures. In particular, our business and user communities benefit from
              network effects, whereby Skype products become more valuable as more people use them, thereby creating an incentive for existing users to
              encourage new users to join. As more users join and attract others, Skype creates more value for users, thereby increasing engagement. These positive
              network effects have helped us grow our user base and establish Skype as a well-recognized brand in Internet communication, without requiring us to
              make significant investments in sales and marketing activities.

                    Our relatively low capital expenditures are primarily due to the “peer-to-peer” architecture that enables our software platform and leverages the
              network resources of our users to connect them. This architecture provides us with a significant cost advantage because we are not required to build or
              maintain a physical communications network, such as a wire or fiber optic network or cellular infrastructure. As a result, we can add new users and
              provide them with a wide range of products at minimal incremental cost to us, allowing us to offer many of our products for free. Furthermore, we
              have relatively low cash tax expense, expressed as a percentage of our income or loss before income taxes.

                                                                            Summary Financial Data
                    The following summary financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial
              Condition and Results of Operations,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” our audited consolidated financial
              statements as of December 31, 2009 and for the Successor period from November 19, 2009 to December 31, 2009, the Predecessor period from
              January 1, 2009 to November 18, 2009, as of and for the Predecessor year ended December 31, 2008 and for the Predecessor year ended December
              31, 2007, as well as our unaudited interim condensed consolidated financial statements as of and for the six month Successor period ended June 30,
              2010 and for the six month Predecessor period ended June 30, 2009, and their respective notes included elsewhere in this prospectus.

                    On November 19, 2009, Skype Global acquired the Communications business segment of eBay, which consisted of the assets and liabilities of
              the Skype Companies (which we refer to as the “Skype Acquisition”). As a result of the Skype Acquisition, the financial results for the year ended
              December 31, 2009 have been presented for the Predecessor for the period from January 1, 2009 to November 18, 2009, and for the Successor for the
              period from November 19, 2009 to December 31, 2009.


                                                                                        11




19 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                    In addition, on October 14, 2005, eBay acquired the Skype Companies (with the exception of Skype Holdings, which eBay formed to
              consummate the acquisition in 2005; one of the Skype Companies, Sonorit, which eBay acquired in April 2006; and certain indirect subsidiaries of
              Skype Global incorporated subsequent to the acquisition by eBay) (which we refer to as the “eBay Acquisition”). Accordingly, the summary financial
              results for the year ended December 31, 2005 have been presented for the pre-eBay predecessor entity (which we refer to as the “Pre-eBay
              Predecessor”) prior to the eBay Acquisition for the period from January 1, 2005 to October 13, 2005 and for the Predecessor following the eBay
              Acquisition for the period from October 14, 2005 to December 31, 2005.

                     Our summary statement of operations data and cash flows data for the Predecessor years ended December 31, 2008 and 2007, for the
              Predecessor period from January 1, 2009 to November 18, 2009 and for the Successor period from November 19, 2009 to December 31, 2009, have
              been derived from audited consolidated financial statements which have been prepared in accordance with United States generally accepted
              accounting principles (U.S. GAAP) and are included elsewhere in this prospectus. See Note 2 to our consolidated financial statements to understand
              the basis of presentation of our consolidated financial statements during the Predecessor and Successor periods. The summary statement of operations
              data below for the Pre-eBay Predecessor period from January 1, 2005 to October 13, 2005, for the Predecessor period from October 14, 2005 to
              December 31, 2005 and for the Predecessor year ended December 31, 2006, are derived from unaudited financial statements that were prepared on
              the basis of U.S. GAAP. The summary statement of operations data below as of and for the six month Successor period ended June 30, 2010 and for
              the six month Predecessor period ended June 30, 2009 are unaudited and have been prepared under U.S. GAAP.

                    The Skype Acquisition was accounted for as a business combination using the acquisition method and resulted in a new basis of accounting in
              the acquired Skype Companies. Accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair value at the
              acquisition date on November 19, 2009. The excess of purchase price over the tangible assets, identifiable intangible assets and assumed liabilities
              was recorded as goodwill (see Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for further information).
              The vertical lines separating the Successor, Predecessor and Pre-eBay Predecessor financial data in this prospectus are included to highlight the lack
              of comparability between these accounts due to the period durations and new basis of accounting resulting from the Skype Acquisition and the eBay
              Acquisition, respectively.

                    For presentation purposes, we refer in this prospectus to the Predecessor’s combined financial statements and the Successor’s consolidated
              financial statements collectively as our “consolidated financial statements.”


                                                                                        12




20 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


              Summary Statement of Operations Data from 2005 to 2009
                                                                     Pre-eBay
                                                                    Predecessor                                        Predecessor                                           Successor
                                                                                                                                                          January 1         November 19
                                                                    January 1        October 14                                                              to                  to
                                                                        to               to           Year ended      Year ended           Year ended     November           December
                                                                    October 13,     December 31,     December 31,    December 31,         December 31,       18,                31,
                                                                       2005            2005              2006             2007                2008          2009               2009
                                                                                                       (thousands of U.S. dollars, except share data)
              Summary Statement of Operations Data:
              Net revenues:                                         $    47,076     $      24,809    $     193,696     $     381,551       $   551,364    $   626,458       $     92,445
              Cost of net revenues(1)                                    33,729            17,842          140,107           228,638           290,053        293,533             44,836(2)
                  Gross profit                                           13,347             6,967           53,589           152,913           261,311        332,925             47,609
              Operating expenses:
                  Sales and marketing(1)                                  14,200           13,097            59,787            67,195           85,630         111,029            17,267
                  Product development(1)                                   5,027            6,536            38,900            22,078           31,124          34,993             5,809
                  General and administrative(1)(3)                        11,588            5,787            37,865            41,169           51,863          50,208           113,284(4)
                  Amortization of acquired intangible assets                —              13,694            60,156            65,514           69,832          55,453            13,284(2)
                  Litigation settlement                                     —                —                 —                 —                —            343,826(5)           —
                  Impairment of goodwill                                    —                —                 —            1,390,938(6)          —               —                 —
                       Total operating expenses                           30,815           39,114           196,708         1,586,894          238,449         595,509           149,644
              (Loss)/income from operations                              (17,468)         (32,147)         (143,119)       (1,433,981)          22,862        (262,584)         (102,035)
              Interest income and other (expense), net                       272              493             2,029             5,303           10,297          (2,549)            5,492
              Interest expense                                              —                —                 —                 —                —               —              (10,387)(7)
              (Loss)/income before income taxes                          (17,196)         (31,654)         (141,090)       (1,428,678)          33,159        (265,133)         (106,930)
              Income tax (benefit)/expense                                 1,141           (2,380)          (22,044)          (23,342)          (8,447)          3,950            (7,209)
              Net income (loss)                                     $    (18,337)   $     (29,274)   $     (119,046)   $   (1,405,336)     $    41,606    $   (269,083)     $    (99,721)
              Basic and diluted net loss per share (Class A
                 through J):(8)                                                                                                                                             $     (10.59)
              Weighted number of shares, basic and diluted (Class
                 A through J):(8)                                                                                                                                               9,414,600


                                                                                                     13




21 of 341                                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents



              (1)   Figures for the periods shown below include stock-based compensation expense as follows:

                                                                             Pre-eBay
                                                                            Predecessor                                                      Predecessor                                                         Successor
                                                                                                     October 14                                                                       January 1
                                                                              January 1                  to                                                                              to                  November 19
                                                                                 to                  December               Year ended        Year ended        Year ended            November                   to
                                                                             October 13,                31,               December 31,      December 31,      December 31,               18,                 December 31,
                                                                                2005                   2005                    2006              2007              2008                 2009                    2009
                                                                                                                                       (thousands of U.S. dollars)
              Cost of net revenues                                          $         —              $        —           $        2,141    $          200    $         (145)         $        331           $              6
              Sales and marketing                                                    2,897                   7,681                10,247             1,953             4,570                 8,564                        111
              Product development                                                    4,024                   4,658                13,303             3,883             5,443                 2,910                         92
              General and administrative                                             1,561                   2,980                 7,378             4,233             2,958                 2,680                         52
              Total                                                         $        8,482           $      15,319        $       33,069    $       10,269    $       12,826          $     14,485           $            261

              (2)   Cost of net revenues and amortization of acquired intangible assets for the Successor period from November 19, 2009 to December 31, 2009 include $4.2 million and $13.3 million of amortization
                    costs, respectively, relating to the amortization of the intangible assets acquired in the Skype Acquisition. The increase from the Predecessor period is a result of the Skype Acquisition, whereby the
                    gross carrying amount of intangible assets increased from $340.5 million as of December 31, 2008 to $805.6 million as of December 31, 2009.
              (3)   The consummation of this offering will trigger payments under management services agreements entered into in connection with the Skype Acquisition in aggregate amount of $                  million. See
                    “Certain Relationships and Related Party Transactions—Management Service Agreements.”
              (4)   This amount includes $98.7 million of transaction fees and expenses incurred in connection with the Skype Acquisition.
              (5)   This amount represents the net charge incurred by us in connection with the settlement that we and eBay reached with Joltid regarding our use of the “Global Index” technology that facilitates
                    communications in the peer-to-peer network of Skype users. For more information regarding this settlement and the Joltid Transaction generally, please refer to “Management’s Discussion and
                    Analysis of Financial Condition and Results of Operations—Key Factors Affecting Results of Operations,” “Certain Relationships and Related Party Transactions—Acquisition-Related
                    Matters—The Joltid Transaction” and Note 13 to our audited consolidated financial statements included elsewhere in this prospectus.
              (6)   This amount represents the impairment in 2007 of the goodwill recorded in connection with our acquisition by eBay in 2005. As a result of the assessment in 2007 that the carrying value of that
                    goodwill exceeded its fair value, an impairment charge of $1.4 billion was recorded. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of
                    Operations—Results of Operations—Impairment of Goodwill” and Note 4 to our audited consolidated financial statements included elsewhere in this prospectus.
              (7)   This amount represents the net interest expense, including amortization of original issuance discount and deferred financing cost, incurred for the Successor period from November 19, 2009 to
                    December 31, 2009 in connection with the indebtedness incurred to finance the Skype Acquisition, as described further under “Management’s Discussion and Analysis of Financial Condition and
                    Results of Operations—Liquidity and Capital Resources—Indebtedness.”
              (8)   Per share information is not provided for the Predecessor periods from October 14, 2005 to November 18, 2009 because the Predecessor financial statements have been prepared on a combined
                    basis and have an equity structure reflecting eBay’s net investment in the Skype Companies. In addition, we have not provided per share information for the Pre-eBay Predecessor period as the
                    information does not provide a meaningful comparison to the operations of the entity subsequent to the eBay Acquisition in 2005 or the Skype Acquisition in 2009.



                                                                                                                     14




22 of 341                                                                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


              Summary Statement of Operations Data for the Six Month Successor Period ended June 30, 2010 and the Six Month Predecessor Period
              ended June 30, 2009
                    Results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results of operations that may be achieved for
              the entire year.

                                                                                                      Predecessor                                 Successor
                                                                                                   Six months ended                           Six months ended
                                                                                                     June 30, 2009                              June 30, 2010
                                                                                                          (thousands of U.S. dollars, except share data)
                          Net revenues:                                                            $      324,838                           $       406,170
                          Cost of net revenues(1)                                                         161,138                                   199,820(2)
                                 Gross profit                                                             163,700                                   206,350
                          Operating expenses:
                                 Sales and marketing(1)                                                    57,343                                    70,998
                                 Product development(1)                                                    20,549                                    29,950
                                 General and administrative(1)                                             23,681                                    46,824
                                 Amortization of acquired intangible assets                                31,147                                    57,154(2)
                                       Total operating expenses                                           132,720                                   204,926
                          Income (loss) from operations                                                    30,980                                     1,424
                          Realized loss on amended credit agreement                                           —                                     (13,513)(3)
                          Interest income and other (expense), net                                         (6,119)                                   31,330
                          Interest expense                                                                    —                                     (35,606)(4)
                          (Loss)/income before income taxes                                                24,861                                   (16,365)
                          Income tax expense / (benefit)                                                    2,327                                   (29,486)
                          Net income                                                               $       22,534                           $        13,121
                          Basic and diluted net income per share (Class A through I):(5)                                                    $           —
                          Basic and diluted net income per share (Class J):(5)                                                              $         13.88
                          Weighted number of shares, basic and diluted (Class A through
                             I):(5)                                                                                                               8,486,873
                          Weighted number of shares, basic and diluted (Class J):(5)                                                                942,986


                                                                                        15




23 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                    http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents



              (1)   Includes stock-based compensation expense as follows:


                                                                                                                                 Predecessor                                     Successor
                                                                                                                              Six months ended                                Six months ended
                                                                                                                                June 30, 2009                                  June 30, 2010
                                                                                                                                        (thousands of U.S. dollars, except share data)
                              Cost of net revenues                                                                          $                369                                $                   51
                              Sales and marketing                                                                                          3,705                                                 1,722
                              Product development                                                                                          3,309                                                   813
                              General and administrative                                                                                   1,453                                                   495
                              Total                                                                                         $              8,836                                $                3,081
              (2)   Cost of net revenues and amortization of acquired intangible assets for the Successor six months ended June 30, 2010 include $18.1 million and $57.2 million of amortization costs, respectively,
                    relating to the amortization of the intangible assets acquired in the Skype Acquisition. The increase from the comparable period in 2009 is a result of the Skype Acquisition, whereby the gross
                    carrying amount of intangible assets increased from $340.5 million as of December 31, 2008 to $805.6 million as of December 31, 2009.
              (3)   This amount represents the expense incurred in connection with the amendment of our Amended Five Year Credit Agreement in February 2010, described under “Management’s Discussion and
                    Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”
              (4)   This amount represents the net interest expense, including amortization of original issuance discount and deferred financing cost, incurred for the six months ended June 30, 2010 in connection with
                    the outstanding indebtedness incurred to finance the Skype Acquisition, described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
                    Capital Resources—Indebtedness.”
              (5)   Per share information is not provided for the Predecessor six months ended June 30, 2009 because the Predecessor financial statements have been prepared on a combined basis and have an equity
                    structure reflecting eBay’s net investment in the Skype Companies.



                                                                                                                 16




24 of 341                                                                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                     http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


              Summary Balance Sheet Data
                      Our consolidated balance sheet data as of June 30, 2010 is presented:
                        •     on an actual basis; and
                        •     on an as adjusted basis to give effect to the sale of ADSs by us in this offering at an assumed initial public offering price of $         per
                              share, which is the mid-point of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting
                              discounts and commissions and estimated offering expenses payable by us, the payment of approximately $                 million to certain of our
                              shareholders upon the consummation of this offer in connection with the termination of our management service agreements with them, and
                              the application of such net proceeds as described under “Use of Proceeds.”

                                                                                                                                                                As of June 30, 2010
                                                                                                                                                 Actual                                As adjusted(1)
                                                                                                                                                             (thousands of U.S. dollars)
                              Summary Balance Sheet Data:
                              Cash and cash equivalents                                                                                      $   85,493
                              Total current assets                                                                                              182,586
                              Property and equipment, net                                                                                        19,252
                              Goodwill                                                                                                        2,372,779(2)
                              Intangible assets, net                                                                                            712,903(3)
                              Total assets                                                                                                    3,312,817

                              Accrued expenses and other current liabilities                                                                     99,548
                              Deferred revenue and user advances                                                                                150,250
                              Total current liabilities                                                                                         317,272
                              Long term debt                                                                                                    690,107(4)
                              Total liabilities                                                                                               1,058,463
                              Total shareholders’ equity                                                                                      2,254,354
                              Total liabilities and shareholders’ equity                                                                     $3,312,817
              (1)   Each $1.00 increase or decrease in the assumed initial public offering price of $           per share, the midpoint of the range reflected on the cover page of this prospectus, would increase or
                    decrease, as applicable, our cash and cash equivalents, total current assets, total assets, total shareholders’ equity and total liabilities and shareholders’ equity by approximately $      million,
                    assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and
                    estimated offering expenses payable by us.
              (2)   This amount represents the excess of purchase price over the tangible assets, identifiable intangible assets and assumed liabilities in the Skype Acquisition, which has been recorded as goodwill.
              (3)   This amount represents the identifiable intangible assets acquired in connection with the Skype Acquisition and the Joltid Transaction. As a result of the Skype Acquisition, the gross carrying amount
                    of intangible assets increased from $340.5 million as of December 31, 2008 to $805.6 million as of June 30, 2010.
              (4)   This amount represents the outstanding amount as of June 30, 2010 of long-term debt incurred to finance the Skype Acquisition, as described under “Management’s Discussion and Analysis of
                    Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”



                                                                                                                  17




25 of 341                                                                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


              Summary Cash Flow Data

                                                                                           Predecessor                                      Successor                           Predecessor                  Successor
                                                                   Year ended               Year ended            January 1 to           November 19 to                          Six months                 Six months
                                                                  December 31,             December 31,          November 18,             December 31,                              ended                      ended
                                                                     2007                      2008                  2009                      2009                            June 30, 2009               June 30, 2010
                                                                                                                             (thousands of U.S. dollars)
              Summary Cash Flow Data:
              Net cash provided by (used in)
                operating activities:                             $      80,220            $ 148,801             $ 128,049                   $     (150,913)(2)                $     93,976                $     64,830
              Net cash provided by (used in)
                investing activities:                                 (536,020)(1)                (4,964)              (11,733)                  (1,958,981)(3)                       (5,264)                   (12,869)
              Net cash provided by (used in)
                financing activities:                                  468,354(1)                 13,305             (263,302)                    2,082,013(4)                            —                     (67,234)(5)
              (1)   This amount primarily reflected a $530.3 million cash payment by eBay pursuant to an earn-out settlement agreement with certain former shareholders of the Pre-eBay Predecessor and the
                    earn-out representative. Financing activities to finance this payment resulted in a corresponding increase in net cash provided by financing activities.
              (2)   This amount was impacted by outgoing cash payments of $94.4 million in connection with the Joltid litigation settlement as part of the Joltid Transaction. For more information see “Certain
                    Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid Transaction” and Note 13 to our audited consolidated financial statements included elsewhere in this
                    prospectus. In addition, net cash of $98.7 million was also paid as fees and expenses in connection with the Skype Acquisition.
              (3)   This amount includes $1.9 billion in cash paid to eBay as a portion of the consideration in the Skype Acquisition. In addition, $34.6 million was paid to acquire intangible assets as part of the Joltid
                    Transaction we entered into prior to the Skype Acquisition.
              (4)   This amount includes $681.7 million net proceeds from indebtedness incurred in connection with the Skype Acquisition and $1.4 billion in net cash proceeds from the issuance of common stock in
                    the Skype Acquisition.
              (5)   This amount primarily reflects the refinancing of our Amended Five Year Credit Agreement and the contemporaneous repayment of the entire $125.0 million outstanding payment-in-kind loan
                    agreement with eBay.


              Key Metrics
                    We monitor certain key operating metrics that we believe drive our financial performance, including net revenues, and that we use to measure
              usage during different periods of the year to manage our business and to help identify potential fraudulent activities. These metrics are derived from
              our operational systems, as opposed to our financial reporting systems. As our business evolves and we continue to gain further insight into our
              growing business, we may change the method of calculating our key operating metrics, enhance our operational systems to address uncertainties in
              these metrics or add new key operating metrics to reflect the changes in our business.

                    Our registered user metric is subject to a degree of overstatement. Other metrics are subject to uncertainties and inaccuracies and may be
              overstated or understated. For more information, see “Risk Factors—The number of our registered users overstates the number of unique individuals
              who register to use our products,” “—Our connected users metric is subject to uncertainties and may overstate the number of users who actively use
              our products” and “—Our paying user and communications services billing minutes metrics are subject to a degree of inaccuracy due to fraudulent
              transactions and our method of calculating these metrics.”


                                                                                                                     18




26 of 341                                                                                                                                                                                                            8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                   For details of how we calculate each of these metrics, as well as certain key assumptions relating to these metrics, see “Selected Financial
              Data—Key Metrics.”

                   The table below shows our registered users as of the relevant dates specified below as well as the average monthly connected users and
              average monthly paying users for the three months ended on the relevant dates specified below:

                                                                                                                 As of or for the three months ended, as applicable,
                                                                   December 31, 2007               December 31, 2008               December 31, 2009                          June 30, 2009             June 30, 2010
                                                                                                                                       (millions)
              Registered     users(1)                                               217                            325                             474                                    397                     560
              Average monthly connected
                users(2)                                                             52                              75                            105                                       91                   124
              Average monthly paying users                                           4.6                             5.8                            7.3                                     6.6                    8.1
              (1)   Our registered users number as of December 31, 2007, 2008 and 2009 includes 3 million, 17 million and 20 million, and as of June 30, 2009 and 2010 includes 19 million and 20 million users,
                    respectively, who registered through their MySpace account. We believe that MySpace registered users are infrequent users of Skype products. We have notified MySpace that we do not intend to
                    renew the contract, through which users can register through MySpace, when it expires on November 27, 2010. The registered users number in the table above excludes users that have registered
                    on Skype through our investment to address the Chinese market, Tel-Online Limited; the number of users that registered through Tel-Online Limited amounted to 59 million, 80 million and 86 million
                    as of December 31, 2007, 2008 and 2009, respectively, and 83 million and 88 million users as of June 30, 2009 and 2010, respectively.
              (2)   Our average monthly connected users number for the three months ended December 31, 2007, 2008 and 2009 includes 1 million, 4 million and 2 million, and for the three months ended June 30,
                    2009 and 2010 includes 3 million and 1 million users, respectively, who registered through their MySpace account. We believe that MySpace connected users are infrequent users of Skype
                    products. We have notified MySpace that we do not intend to renew the contract, through which users can register and connect through MySpace, when it expires on November 27, 2010. The
                    average monthly connected users number in the table above excludes users that have connected to Skype through our investment to address the Chinese market, Tel-Online Limited; the average
                    monthly connected users that connected through Tel-Online Limited amounted to 4 million, 3 million and 2 million for the three months ended December 31, 2007, 2008 and 2009, respectively, and
                    2 million users for both the three months ended June 30, 2009 and 2010.


                  The table below shows average communications services revenue per paying user, which represents our net revenues derived from our
              communications services products for the relevant period divided by the average paying users for such period:

                                                                                                                                                                                       ANNUALIZED,(1) based on
                                                                                                                                                                                                data for
                                                                                                                                                For the year ended                       the six months ended
                                                                                                                                                  December 31,                                  June 30,
                                                                                                                                            2007        2008        2009                    2009             2010
                                                                                                                                                                           (U.S. dollars)
              Average communications services revenue per paying user                                                                       $ 81       $102         $ 98              $            94    $          96
              (1)   For purposes of comparison on an annual basis, the average communications services revenue per paying user for the six months ended June 30, 2009 and 2010 has been converted into annualized
                    figures for the years 2009 and 2010 based on the six month net revenues in those years.



                                                                                                                19




27 of 341                                                                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                    The table below shows our communications services billing minutes and Skype-to-Skype minutes for each of the periods presented:


                                                                                                            For the year ended
                                                                                                              December 31,                    For the six months ended,
                                                                                                        2007     2008       2009            June 30, 2009    June 30, 2010
                                                                                                                                   (billions)
              Communications services billing minutes                                                    4.1      6.9       10.7                    5.0               6.4
              Skype-to-Skype minutes                                                                    43.4     65.5      113.0                   49.1              88.4

              Adjusted EBITDA
                     To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we use Adjusted EBITDA as a
              non-GAAP performance measure. We present Adjusted EBITDA because it is used by our board of directors and management to evaluate our
              operating performance, and we consider it an important supplemental measure of our performance. Adjusted EBITDA, as we present it, represents net
              income before income tax (benefit)/expense, interest expense, interest income and other (expense), net, depreciation and amortization, further adjusted
              for the following additional items:
                     •    Stock-based compensation expense;
                     •    Impairment of goodwill;
                     •    Realized loss upon amendment of our Five Year Credit Agreement;
                     •    Costs we incurred as a result of the Skype Acquisition, such as external transaction costs, payments under management services
                          agreements with shareholders of Skype, transition services agreement costs payable to eBay and cash bonuses to certain Skype employees;
                     •    Litigation settlement costs;
                     •    Separation cost incurred subsequent to the Skype Acquisition; and
                     •    Foreign exchange gains and losses prior to invoice receipt.

                    Adjusted EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. In addition, this non-GAAP
              measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations in that it
              does not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. In particular:
                     •    Unless reconciled to our pro forma net income, Adjusted EBITDA is not a pro forma measure, nor does it purport to represent what our
                          consolidated results of operations would have been had the Skype Acquisition not occurred or occurred on a different date;
                     •    Adjusted EBITDA is not indicative of our future consolidated results of operations;
                     •    Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures;
                     •    Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal
                          payments, on our debt;
                     •    Adjusted EBITDA does not reflect our tax expense; and


                                                                                        20




28 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                    http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


                        •     Others may calculate Adjusted EBITDA differently than we do and these calculations may not be comparable to our Adjusted EBITDA
                              metric.

                    The following table reconciles our Adjusted EBITDA for the Predecessor years 2007, 2008, for the Predecessor period from January 1, 2009 to
              November 18, 2009, the Successor period from November 19, 2009 to December 31, 2009, the pro forma year 2009, and each of the six months ended
              June 30, 2009 (Predecessor and pro forma) and 2010 to the nearest U.S. GAAP performance measure, which is net income (loss):

                                                                                                                                 Predecessor      Successor
                                                                                    Year ended December 31,                        Jan 1 –         Nov. 19 –                    Six months ended June 30,
                                                                           Predecessor      Predecessor         Pro forma          Nov. 18,         Dec. 31,           Predecessor        Pro forma        Successor
                                                                              2007             2008              2009 (1)           2009             2009                 2009             2009 (1)          2010
                                                                                                                                 (thousands of U.S. dollars)
              Net (loss)/income                                               (1,405,336)          41,606         (417,547)          (269,083)        (99,721)                 22,534        (46,440)           13,121
              Income tax (benefit)/ expense                                      (23,342)          (8,447)         (21,398)             3,950           (7,209)                 2,327        (24,380)          (29,486)
              Interest expense                                                      —                 —             89,643               —             10,387                    —            44,527            35,606
              Interest income and other expense, net                              (5,303)         (10,297)          (2,942)             2,549           (5,492)                 6,119          6,119           (31,330)
              Depreciation and amortization                                       73,303           75,534          156,543             60,649          18,400                  33,571         77,639            79,234
              Stock-based compensation                                            10,269           12,826           14,746             14,485              261                  8,836          8,836             3,081
              Impairment of goodwill                                           1,390,938              —               —                  —                —                      —              —                  —
              Realized loss on credit agreement                                     —                 —               —                  —                —                      —              —               13,513
              Management Services Agreements with shareholders(2)                   —                 —             14,177               —               1,685                   —             7,086             7,294
              Skype Acquisition transaction fees(3)                                 —                 —               —                  —             98,715                    —              —                  —
              Skype Acquisition transaction bonuses(4)                              —                 —               —                 3,647             —                      —              —                  —
              Transition Services Agreement(5)                                      —                 —              1,118                               1,118                   —              —                2,111
              Excluded bonus(6)                                                     —                 —              1,755                144            1,611                   —              —                6,107
              Joltid litigation settlement(7)                                       —                 —            343,826            343,826             —                      —              —                  —
              Other litigation settlements(8)                                       —                (410)           2,928              2,928             —                      —              —                 (784)
              Separation costs(9)                                                   —                 —              2,054                873            1,181                   —              —                5,166
              Foreign exchange gains and losses prior to invoice
                   receipt(10)                                                      —                (334)              (8)             (1,140)            1,132                1,849          1,849            12,118
              Adjusted EBITDA                                                     40,529          110,478          184,895             162,828            22,068               75,236         75,236           115,751

              (1)   See “Unaudited Pro Forma Condensed Consolidated Financial Information” and the notes thereto included elsewhere in this prospectus to understand how pro forma net income was computed.
              (2)   In connection with the Skype Acquisition, we entered into management service agreements with certain of our shareholders and their affiliates, which provide for the payment of periodic monitoring
                    fees for management, financial, consulting and other advisory services provided by them to us after completion of the Skype Acquisition. See “Certain Relationships and Related Party Transactions
                    —Management Services Agreements.”
              (3)   This amount represents the external transaction fees and expenses incurred in connection with the Skype Acquisition.
              (4)   This amount represents cash bonus payments to certain Skype executives that vested upon the completion of the Skype Acquisition.
              (5)   Our indirect subsidiary, Skype Technologies S.A., entered into a transition services agreement with eBay pursuant to which eBay has agreed to provide us certain transition services in connection
                    with the conduct of our business. The initial term is one year from the date of the Skype Acquisition, except for customer service applications support, the term for which was six months. See
                    “Certain Relationships and Related Party Transactions—Acquisition-Related Matters—The Skype Acquisition and Ancillary Agreements—Transition Services Agreement.”
              (6)   In conjunction with the Skype Acquisition, a special cash pool was funded to reward eligible Skype employees. Employees are eligible to receive a bonus based on continued employment that will
                    vest on the one-year anniversary of the Skype Acquisition. The total estimated value of the awards to be granted and funded is $ 10.0 million and was recorded as an asset in the opening balance
                    sheet of the Skype Companies and is being amortized as compensation expense based on the actual value of the award that is estimated to vest. See “Certain Relationships and Related Party
                    Transactions—Acquisition-Related Matters—The Skype Acquisition and Ancillary Agreements—Cash Pool.” In addition, certain employees are eligible for bonus payments that will vest prior to or
                    on one-year anniversary of the Skype Acquisition based on the successful achievement of certain strategic initiatives outlined by the Company in conjunction with our separation from eBay.
              (7)   This amount represents the net charge incurred by us in connection with the settlement by us and eBay of a dispute with Joltid over our use of peer-to-peer communication technology. For more
                    information about the Joltid Transaction, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Results of Operations”,
                    “Certain Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid Transaction” and Note 13 to our audited consolidated financial statements included elsewhere in
                    this prospectus.
              (8)   Reflects additional losses or (gains) we recorded related to litigation settlements other than the Joltid Transaction discussed above. See “Business—Legal Proceedings” for a discussion of other
                    legal and regulatory proceedings, disputes and regulatory inquiries related to our business.
              (9)   Separation costs primarily relate to external service provider fees for strategic projects aimed at building processes for scaling the Company subsequent to the Skype Acquisition, establishing new
                    employee benefit structures and compensation programs and planning for the implementation of our stand alone IT infrastructure, as well as tax, legal and other consulting fees related to our
                    separation from eBay.



                                                                                                                 21




29 of 341                                                                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents


              (10) Under U.S. GAAP, foreign currency gains and losses arising from the re-measurement of monetary assets and liabilities into our functional currencies (“foreign currency gains and losses”) are
                    recorded in our statements of operations as a component of interest income and other (expense), net. As indicated above, we remove the total amount of interest income and other (expense), net
                    from our calculation of Adjusted EBITDA. However, we do include in Adjusted EBITDA the foreign currency gains and losses arising between the date of initial expense recognition and the date
                    of invoice receipt, at which point we believe management has less control over foreign currency gains and losses.


                                                                                                                22




30 of 341                                                                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                                 RISK FACTORS

                  An investment in our ordinary shares or ADSs involves a high degree of risk. Before making an investment in our ordinary shares or ADSs, you
            should carefully consider the following risks, as well as the other information contained in this prospectus. Any of the risks described below and
            elsewhere in this prospectus could materially harm our business, prospects, financial condition and results of operations. The risks described below
            are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial could also
            materially harm our business, prospects, financial condition and results of operations. As a result, the trading price of our ordinary shares or ADSs
            could decline, and you may lose part or all of your investment.

            Risks Related to Our Business
            We may not maintain recent rates of net revenue growth.
                 Although our net revenues have increased substantially over the last few years, we may not be able to maintain historical rates of net revenue growth.
            We believe that our continued growth will depend, among other factors, on our ability to:
                   •    attract new users, convert connected users into paying users, keep existing paying users actively using our paid products, and increase
                        purchases of our paid products by our paying users;
                   •    develop new sources of revenue from our users and other customers, such as business users;
                   •    react to changes in consumer access to and use of the Internet;
                   •    expand into new market segments and integrate new devices, platforms and operating systems;
                   •    increase the awareness of our brand across geographies;
                   •    provide our customers with a superior user experience, customer support and payment experiences; and
                   •    maintain effective and integrated payment processing capabilities.

                  However, we cannot assure you that we will successfully implement any of these steps.

            We may not maintain profitability.
                   We reported net income of $13.1 million for the six months ended June 30, 2010, a net loss of $269.1 million in the period from January 1, 2009 to
            November 18, 2009, a net loss of $99.7 million in the period from November 19, 2009 to December 31, 2009, a pro forma net loss of $417.5 million
            during the year ended December 31, 2009 (including litigation settlement expenses in the net amount of $343.8 million incurred in connection with the
            Joltid Transaction and excluding expenses of $98.7 million related to the Skype Acquisition), net income of $41.6 million in 2008 and a net loss of $1.4
            billion (including a goodwill impairment charge of $1.4 billion) in 2007. We reported an accumulated deficit of $86.6 million as of June 30, 2010. We
            may incur net losses again and cannot assure you that we will be profitable in the future or that, if we are, we will be able to maintain profitability. We
            believe that our profitability will depend, among other factors, on our ability to:
                   •    increase or maintain our net revenues (see “—We may not maintain recent rates of net revenue growth.”);
                   •    manage the costs of our business, including the costs associated with maintaining and developing our software and products and expanding our
                        products to business users, termination costs, customer support and product expansion into new jurisdictions;
                   •    manage the costs associated with regulatory compliance;

                                                                                          23




31 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                    •   meet the challenge imposed by the intensely competitive nature of our business, including competition from large, well-established Internet
                        companies, telecommunications companies and hardware-based voice over Internet protocol providers and, as we enter into new business
                        areas, small and medium-size enterprise telecommunication services providers;
                    •   successfully complete our separation from eBay and establish ourselves as a standalone entity following the termination of the Transition
                        Services Agreement with eBay in November 2010 (subject to any extension); and
                    •   maintain our current tax position.

            The rate at which we add registered, connected and paying users may decline. In addition, we may fail to successfully convert connected users into
            paying users.
                  In 2009, 149 million new users registered a Skype username, and we grew our average monthly connected users by 30 million users for the three
            months ended December 31, 2009 compared to the same period in 2008. See, however, “—The number of our registered users overstates the number of
            unique individuals who register to use our products” and “—Our connected user metric is subject to uncertainties and may overstate the number of users
            who actively use our products.” We may fail to attract new registered users at an equivalent rate in the future. Furthermore, we lose connected users in the
            ordinary course of business. As a result, we need to acquire new connected users on an ongoing basis just to maintain our existing level of connected users.
            We must also convert connected users into paying users. If we are unable to attract new registered users, retain them as connected users and convert
            non-paying users into paying users, our business, results of operations and financial position will suffer.

            Our operating results may fluctuate. As a result, we may have difficulty forecasting net revenues and planning expenditures to support
            development of our operations. Fluctuations in our operating results may cause us to fail to meet or exceed the expectations of securities analysts
            or investors, which could cause the market price of our ADSs to decline.
                  Our operating results have varied on a quarterly basis during our operating history. Our operating results may fluctuate significantly as a result of a
            variety of factors, many of which are outside our control, including:
                    •   Currency fluctuations: Because we have substantial global operations, we transact in a number of currencies but report our financial results
                        in U.S. dollars. As exchange rates may fluctuate significantly between reporting periods, our net revenues, expenses and operating results,
                        when translated into U.S. dollars, may experience significant fluctuations between periods for reasons unrelated to our operating performance.
                        We therefore face exposure to adverse movements in currency exchange rates. To the extent the U.S. dollar weakens against foreign currencies,
                        our net revenues and expenses from foreign-currency-denominated operations, when reported in U.S. dollars, will increase. Similarly, our net
                        revenues and operating expenses from foreign-currency-denominated operations will be lower to the extent the U.S. dollar strengthens against
                        foreign currencies. In particular, to the extent the U.S. dollar strengthens against the euro and the British pound, our foreign net revenues will
                        be reduced when reported in U.S. dollars. In addition, the currencies in which we incur cost of net revenues and operating expenses may not be
                        the same as the currencies in which we sell products to our users and customers and generate net revenues. We also may receive payments in a
                        different currency than the one in which we sell our products to our users or customers. We have only limited currency hedges in place.
                    •   Timing of product launches: Because we are a growing company and are seeking to develop and introduce new products, our net revenues
                        may fluctuate due to our customers responding quickly to our new product offerings. Similarly, our costs fluctuate based on the level of
                        investment in developing, marketing and/or launching products during a given quarter. For example, during any particular period, we may
                        increase the number of employees or contractors to develop new products or launch marketing campaigns, which can increase costs
                        significantly during that period.

                                                                                          24




32 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                    •   Changes in our gross margin: Our gross margin (which we define as gross profit, or net revenues less cost of net revenues, divided by net
                        revenues) can fluctuate in any given period due to a number of factors, including, without limitation, changes in product mix, user usage
                        patterns and pricing, changes in termination costs for our SkypeOut product, and entry into or termination of commercial contracts. With
                        respect to product mix, our subscription-based payment option has historically carried a lower margin than our pay-as-you-go payment option.
                        As a result, changes in user behavior, including in how they prefer to pay for our products, has affected and could in the future affect our
                        product mix and concentration, which could have a negative effect on our gross margin. We change our pricing from time to time, and we may
                        need to decrease the price of our paid for products for a number of reasons, including competitive pressures. In addition, we incur termination
                        costs in connection with our SkypeOut products. Under the contractual arrangements we have with our partners, our termination costs vary
                        from time to time and, therefore, may increase while the net revenues corresponding to those costs may remain the same, resulting in a
                        decreased gross margin. Moreover, in any given period we may enter into commercial contracts, such as product licensing agreements, or
                        these agreements can be terminated, which can cause our net revenues to fluctuate and affect our gross margin.
                    •   Seasonality: Our business exhibits seasonality because many of our users reduce their use of our products with the onset of good weather
                        during the Northern Hemisphere’s summer months and our users tend to use our products more in the fourth quarter during the holiday season
                        resulting in weaker net revenue growth during the second and third quarter of the year. Furthermore, we experience significant spikes in the use
                        of our products during significant holidays or world events, such as Christmas, the Chinese New Year or the recent volcanic eruption in
                        Iceland.
                    •   Litigation: We have incurred, and may in the future incur, significant and unpredictable expenses in connection with litigation. In 2009, our
                        results of operations were adversely affected by litigation settlement expenses in the net amount of $343.8 million incurred in connection with
                        the settlement that we and eBay reached with Joltid regarding our use of the “Global Index” technology that facilitates communications in the
                        peer-to-peer network of Skype users, which we acquired as part of the Joltid Transaction. For more information, see “Certain Relationships
                        and Related Party Transactions—Acquisition-Related Matters—The Joltid Transaction.”

                   Furthermore, it is difficult for us to forecast the level of our net revenues and gross margin. In view of the rapidly evolving nature of our business and
            our limited operating history, we believe that period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon
            them as an indication of future performance. Due to, among other things, our short operating history and the inherent difficulty in forecasting net revenues, it
            is also difficult to forecast expenses as a percentage of net revenues. Quarterly and annual expenses as a percentage of net revenues may be significantly
            different from historical or projected rates. In addition, our gross margin is difficult to predict due to changes in usage patterns, potential future sources of
            additional net revenues and future arrangements with third parties, which may include revenue sharing or other alternative pricing models.

                  In part as a result of the fluctuation in our results and uncertainty of our forecasts, our operating results in one or more future quarters may fall below
            the expectations of securities analysts and investors. In that event, the trading price of our ADSs would almost certainly decline. In addition, fluctuations in
            our operating results may also make it more difficult for securities analysts and investors to assess the longer-term prospects and strength of our business at
            any particular point, which could lead to increased volatility in the price of our ADSs. Increased volatility could cause the price of our ADSs to suffer in
            comparison to less volatile investments.

            We generate net revenues almost entirely from the use of our paid communications services products.
                 Many of our products are free. As a result, we have generated nearly all of our historical revenues from our paid communications services products,
            which are purchased by a small minority of our users. During the three

                                                                                           25




33 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            months ended June 30, 2010, we generated on average net revenues from calls made by approximately 8.1 million paying users to landline or mobile
            phones. These paying users represented less than 7% of our average connected users during this period. If even a small percentage of our paying users
            cease paying for our products, this could have a significant impact on our net revenues.

                  In addition, we have historically derived a substantial portion of our net revenues from a single product—SkypeOut. For the pro forma year ended
            December 31, 2009 and for the six months ended June 30, 2010, 86% and 87% of our pro forma net revenues and net revenues, respectively, were derived
            from the use of SkypeOut. Due to this dependence on SkypeOut as our primary source of net revenues, we are subject to an elevated risk of reduced
            demand for our SkypeOut product.

                   Our other sources of net revenues, including our Skype for Business products and marketing services and licensing, are currently limited. We may
            face challenges as we seek to expand our sources of revenue. For example, the current version of our software does not include functionality to allow
            industry standard-sized advertisements to be delivered to our users via the Skype software client. Furthermore, even if certain versions of the Skype
            software client were able to deliver advertisements, we may face difficulty in successfully implementing advertising on certain platforms, such as mobile
            devices. Finally, our users may respond negatively to receiving advertisements through their Skype software client, which could negatively and materially
            affect user engagement, our Skype brand and our results of operations.

            We have a short operating history and a relatively new business in an emerging and rapidly evolving market. This makes it difficult to evaluate our
            future prospects, may increase the risk that we will not continue to be successful and increases the risk of your investment.
                   We have a short operating history with our communications services products, which were developed in connection with our launch in 2003. As a
            result, we have very little operating history for you to evaluate in assessing our future prospects. Also, we derive nearly all of our net revenues from
            Internet communications, which is a new industry that has undergone rapid and dramatic changes in its short history and is subject to significant challenges.
            We have expanded our headcount, facilities and infrastructure, including since the Skype Acquisition, and we anticipate that further expansion in certain
            areas will be required for us to operate as an independent public company and for the development of some of our businesses. For example, our number of
            employees and contractors increased from 640 people as of June 30, 2009 to 839 people as of June 30, 2010. This expansion has placed, and we expect it
            will continue to place, a significant strain on our management, operational and financial resources. You must consider our business and prospects in light
            of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving market. We may not be able to address successfully
            these risks and difficulties, which could materially harm our business and operating results and reduce the price of our ADSs.

            Goodwill and intangible asset impairment analysis may result in charges, which may be significant.
                   U.S. GAAP requires us to conduct an impairment analysis of our goodwill annually and at such other times when an event or change in circumstances
            occurs that would indicate potential impairment. We are also required to evaluate finite-lived intangible assets for impairment whenever events or changes
            in circumstances indicate that the carrying amount of these intangible assets may not be recoverable. Our limited operating history increases the risk of
            differences between projected and actual performance, which could substantially impact our future estimates of recoverability and fair value. In 2007, our
            results of operations were adversely affected by a charge of $1.4 billion for the impairment of goodwill. The impairment charge was determined by
            comparing the carrying value of goodwill in eBay’s Communications reporting unit with the implied fair value of the goodwill. Following the Skype
            Acquisition in 2009, we recorded the excess of the purchase price over tangible assets, identifiable intangible assets and assumed liabilities in the amount
            of $2.4 billion as goodwill, which is substantially higher than the goodwill in our Predecessor period financial statements. We may be required to write
            down the carrying value of goodwill based on the value of our business in the future. If we conclude that

                                                                                         26




34 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            there is significant impairment of our goodwill as a result of any impairment analysis, we would be required to record corresponding non-cash impairment
            charges, which could negatively and materially affect our operating results and the market price of our ADSs.

            The number of our registered users overstates the number of unique individuals who register to use our products.
                   We calculate registered users as the cumulative number of user accounts at the end of the relevant period. The actual number of registered users
            however is likely to be lower, potentially significantly, for two primary reasons. First, some legitimate users may register more than once and therefore
            have more than one account. For example, a user who has lost his or her original Skype Name or password may simply register again and create an
            additional account, or a user may create separate accounts for business and personal use. Second, we experience irregular registration activities, some of
            which we believe are the result of fraudulent activities that involve the creation of a significant number of spurious user accounts. See “—Failure to deal
            effectively with fraudulent transactions would increase our loss rate, could increase expenses, result in the loss of our ability to accept certain credit cards
            and harm our business.” The actual number of registered users includes users who we actively block from using our services due to our concerns of those
            users engaging in fraudulent activities. We do not validate information provided during the registration process and thus registration is not prohibited, even
            when we have indication that such user may engage in fraudulent activity. Instead, we limit the connection to our services of such registered users.

                   In addition, as of June 30, 2010, the number of registered users includes 20 million users who registered through their MySpace account. Such
            registration occurred automatically as part of the MySpace registration process, and as a result, the number of our registered users may overstate the
            number of users who actively decided to create a Skype account. We believe that users that have registered through MySpace are infrequent users of Skype
            products.

            Our connected users metric is subject to uncertainties and may overstate the number of users who actively use our products.
                  We calculate connected users as the number of user accounts, averaged over a three month period, that log in to the Skype software client, either
            manually or automatically, in a given calendar month. We also include in connected users the number of users, averaged over a three month period, who
            have a valid Skype software certificate (for example, a mobile phone with the Skype software client installed) that is checked and has been validated
            during the past thirty days.

                    The number of connected users is subject to uncertainties and in some ways may overstate the number of users actively using our products during a
            given period. For example, for a number of our users, once a user has downloaded our software onto their device, the software will automatically be
            logged in to when the device is turned on, even if the customer takes no steps to affirmatively engage our software client after initial registration. In
            addition, the number of connected users also includes, for the three months ended June 30, 2010, one million users who connected during such period
            primarily as a result of signing into their MySpace account and who we believe are infrequent users of Skype products. We have notified MySpace that we
            do not intend to renew our contract arrangement with MySpace, through which users can register through MySpace, when it expires on November 27, 2010.
            It is currently uncertain whether users that connected to Skype through MySpace will continue to do so following the expiry of this contract.

                   Furthermore, a number of connected users in a given period includes the creation and use of spurious user accounts, because we count a new
            registered user as a connected user in the month of registration. While we have taken and will seek to continue to take steps, such as by requiring additional
            authentication steps, to reduce the ability of fictitious users to connect to the different versions of the Skype software client, and to prevent users from
            connecting to our system more than once, we cannot assure you that these measures will be effective in reducing the number of fictitious users or users who
            have connected more than once.

                                                                                          27




35 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                 Our connected user metric is also subject to uncertainties because, in some cases, it can underestimate the number of users actively using our
            products during a given period. For example, users accessing Skype from behind a firewall may not be captured in our systems as connected users.

                 As a result, there is a degree of uncertainty in this metric because it can be influenced by different factors in the same period, sometimes with
            opposite effects.

            Our paying user and communications services products billing minutes metrics are subject to a degree of inaccuracy due to fraudulent
            transactions and our method of calculating these metrics.
                  We calculate paying users as the number of unique user accounts, averaged over a three month period, who make a successful SkypeOut call using
            Skype credit on a pay-as-you-go basis in a given calendar month or who had an active subscription at any time during such calendar month. We calculate
            communications services billing minutes as the cumulative number of minutes that Skype users were connected to our communications services products,
            which mainly comprise billing minutes related to SkypeOut calls to traditional fixed-line or mobile telephones during a relevant period. A user need not be
            logged into the Skype software client to be considered as having made a successful SkypeOut call or to register a billing minute; for example, the user may
            make a Skype-to-Go call or use Call Forwarding, which do not require users to log into the Skype software client themselves.

                  With respect to both the number of paying users and the number of communications services billing minutes, these metrics include users paying for
            our products and the billing minutes generated through fraudulent activities, such as stolen credit cards. Therefore, for any given month, in particular if we
            have been subject to a particular spike in fraudulent activity during that period, our paying user and communications services billing minutes may not
            accurately reflect the genuine number of paying users and communications services billing minutes during that period. See “—Failure to deal effectively
            with fraudulent transactions would increase our loss rate, could increase expenses, result in the loss of our ability to accept certain credit cards and harm
            our business.”

                  These metrics are also subject to a degree of inaccuracy for other reasons. These metrics are derived from our operational systems, not our financial
            systems, and we have identified certain instances in the past whereby these systems have not always accurately captured the number of paying users and
            communications services billing minutes. With respect to paying users, we seek to eliminate from our number of paying users any users who only made
            SkypeOut calls utilizing promotional, free Skype credit or promotional subscriptions services. With respect to communications services billing minutes,
            we seek to eliminate from this number minutes attributable to SkypeOut calls made utilizing promotional, free Skype credit or promotional subscriptions
            services, or other free calls. In both cases, our operational systems may fail to classify properly these users and minutes, and accordingly these metrics are
            subject to potential inaccuracies.

            The peer-to-peer nature of our software architecture makes it difficult to determine certain operational metrics.
                  Because our software operates through a peer-to-peer architecture, it is difficult for us to determine with accuracy certain operational metrics with
            respect to non-paid products, such as free calling minutes or the percentage of calls including certain features like video. As a result, these metrics are
            intended as estimates only and may not be accurate. Due to the uncertainty surrounding these operational metrics, we may not take the most appropriate
            decisions for our business and operations or allocate our financial resources in an optimal manner.

            Our industry is intensely competitive and if we do not compete successfully, we could lose market share, experience reduced revenues or suffer
            losses.
                   The market for our products is intensely competitive and characterized by rapid technological change, and we expect competition to intensify
            significantly in the future. In particular, some of our competitors have taken steps or may decide to more aggressively compete against us.

                                                                                          28




36 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                  Our competitors include a variety of communication service and product providers, including Internet product and software companies,
            telecommunications companies and hardware-based voice over Internet protocol providers and, potentially, small and medium-size enterprise
            telecommunications services providers. Many of our competitors are substantially larger than we are and have substantially longer operating histories and
            substantially greater product development and marketing budgets and financial, human and other resources than we do. Some also have greater name and
            brand recognition and a larger base of customers or users than we have. They may be able to devote greater resources to develop, promote, and sell their
            products and to respond quickly to new technologies and changing consumer behavior. We may also face a disadvantage because we do not currently offer
            email, a product that is offered by many of our competitors. Our ability to compete successfully depends on our ability to achieve continual technological
            innovation and adapt to the evolving needs of our customers, but we cannot assure you that we will be successful in this regard.

                  Our primary competitors include:
                   •    Internet and software companies. We compete with divisions of large Internet and software companies, including Google, Microsoft, Apple
                        and Yahoo!, which offer a selection of instant messaging, voice and video communications products to their users. Some of these competitors
                        charge less than we do for voice calls and SMS text messages to landline and mobile devices to or from certain countries, and most have also
                        historically offered free calling between their users. The leading Internet companies have very large networks of users, strong brands and
                        significant resources. In addition, new Internet companies may choose to enter our market and integrate these products with their existing
                        products. If Internet companies, particularly the large Internet companies with well-known brands and large user bases, choose to focus more
                        of their resources on their communications products or otherwise enhance those products or if their users adopt those products instead of ours,
                        this could, among other things, reduce the market for our products, increase competition for users and price competition or make our products
                        obsolete, which could decrease our ability to attract new users or cause our current users to migrate to communications products offered by
                        Internet companies. For example, Google has recently acquired Global IP Solutions, which has developed a real-time audio and video-
                        over-Internet technology similar to ours. Google may use this technology to compete against us.
                   •    Telecommunications companies and hardware-based Voice over Internet Protocol (VoIP) providers. Although we are not a replacement for
                        traditional telephone services, we compete with certain products and services offered by regulated telecommunications companies that
                        provide landline, cable or wireless telecommunications products and hardware-based VoIP telecommunications providers that have recently
                        begun to challenge incumbent telecommunication companies with respect to certain products in their regional markets. The telephone
                        companies have historically dominated their regional markets due to their incumbent status and ability to offer features that we do not provide,
                        such as emergency calling services and “bundled” services. We also compete with certain products offered by cable and satellite broadcast
                        companies. All of these companies have the ability to offer bundled services to their large existing customer bases. For example, they can
                        provide Internet access, television and landline and/or wireless voice communication at a price that would be lower than if the customer
                        purchased those services separately. If the telecommunications companies with which we compete successfully introduce new products, offer
                        bundled services at attractive prices or enhance their existing products, this could reduce the market for our products, increase competition for
                        users and price competition, or make our products obsolete, which could impair our ability to attract new users or cause our current users to
                        migrate to a telecommunications company. In addition, customers may be reluctant to use Internet-based communications instead of traditional
                        telephony services because they may experience lower call quality, including static, echoes and delays in transmissions, as well as a higher
                        rate of dropped calls. We also compete with wireless carriers, many of which have a strong retail presence and significant financial resources.
                        Some consumers use wireless services to replace landline services. Many wireless companies also have a strong retail presence and have
                        significant financial resources. Domestic and international telecommunications prices have decreased significantly over the last few years, and
                        we anticipate that prices will continue to decrease. Users who

                                                                                        29




37 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                        select our products to take advantage of our prices may switch to another provider as the difference between prices diminishes or disappears,
                        and we may be unable to use our price as a distinguishing feature to attract new customers in the future. In addition, we compete with
                        hardware-based voice over Internet protocol providers, which have recently begun to challenge incumbent telecommunication companies in
                        their regional markets through lower cost features and enhanced functionality. If these regional voice over Internet protocol providers are able
                        to replace traditional telecommunications services in their region and offer products similar to ours, this could reduce the market for our
                        products or increase price competition, which could decrease our ability to attract new users or cause our current users to migrate to those
                        providers.
                   •    Small and medium-size enterprise telecommunication services providers. As we develop and build out our business offering, we expect to
                        compete increasingly with small and medium-size enterprise telecommunication services providers. Many of these services providers have a
                        broad set of products and offer features we do not offer, such as email. In addition, some of these services providers have some of the most
                        recognized brands in the business marketplace and incumbent status, including, in certain cases, long-term customer contracts. As a result, it
                        may be difficult for us to compete with them.

                   One particular risk we face is that some of our competitors, particularly large incumbent telephone companies with significant financial resources,
            may attempt to gain significant market share from us by offering their communications products for free or at prices at or below the prices we charge,
            which would have a material adverse effect on our business. These and other competitors may elect to commence or intensify these forms of price
            competition at any time, including shortly after we complete this offering and, because many of these competitors have alternative sources of revenue, they
            may be able to sustain this price competition indefinitely. In addition, we expect our various communications competitors to continue to improve the
            performance of their current products and introduce new communications products, software, services and technologies. Some of our competitors have the
            ability to restrict or increase the price of access to our products and have done so. For example, in Germany, T-Mobile announced in April 2009 that it
            was blocking VoIP communications over its mobile network, and in June 2009 it introduced a fixed monthly fee for the option of using VoIP on its network.
            Many of our competitors offer email as part of their communications solution. We do not offer email, which may harm our ability to compete. If we are
            unable to compete effectively, our growth and ability to sell products at profitable margins could be materially and adversely affected. Going forward, as
            we enhance our communications product offerings, we may enter new markets and face competition from other companies.

                  In certain countries, companies with which we compete may be government owned, sponsored or supported, which may place us at a competitive
            disadvantage. For example, governments in these countries may require us to be regulated or may determine not to provide us with a necessary license. In
            addition, government owned, sponsored or supported companies may be able to obtain financing on terms more favorable than terms available to private
            companies such as us.

            We are subject to proceedings that may jeopardize our exclusive use of the Skype brand.
                   We regard our brand as one of our most valuable assets. The unlicensed use of our brand by third parties could harm our reputation, cause confusion
            among our users, and severely undermine the value of our brand in the marketplace. In that regard, we have registered and are in the process of applying to
            register the “Skype” name and other related marks as trademarks and service marks in various jurisdictions. In the European Union and several other
            countries, some of our applications have received objections from the applicable trademark agency or have been opposed by third parties. In particular, in
            the European Union, India, Norway and Brazil, our applications in respect of the Skype name are being opposed by BSkyB plc., a British satellite
            broadcaster, Internet service and telephony service provider, or by one of its affiliates. These oppositions are based on BSkyB’s claimed rights with
            respect to the mark “SKY.” To date, we have successfully defended these oppositions in Switzerland and Turkey and to date have received a positive
            decision in Brazil. However, on

                                                                                        30




38 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            July 6, 2010, we received a negative first instance decision from the European Union trademark registry (OHIM) on BSkyB’s opposition proceeding
            against the Skype bubble logo trademark application. We intend to appeal this decision by submitting a notice of appeal to the OHIM Board of Appeal, and
            if necessary to the General Court at the Court of Justice of the European Community. If these oppositions to our application for trademark registration are
            ultimately successful, it will be more difficult for us to prevent third parties from using the Skype brand without our permission, which may have a material
            adverse effect on our business. Moreover, a successful opposition to our application in one or more countries might encourage BSkyB or other third parties
            to make additional oppositions or commence trademark infringement proceedings.

                  In addition, if BSkyB or other third parties were to pursue litigation to prevent our use of the Skype name or logo, defending against that litigation
            could be costly and time consuming even if we were ultimately to prevail. If we were not ultimately to prevail in any such litigation to prevent our use of
            the Skype name or logo, we could be precluded from using the Skype name or logo in one or more jurisdictions without obtaining a license from BSkyB or
            such other third parties, which license may not be available on commercially reasonable terms or at all, which could have a material adverse effect on our
            business.

                   In certain countries, such as China, Russia, Brazil and Indonesia, certain third parties have applied for and in some cases have been granted
            trademarks that are identical or similar to ours and, in certain instances, like in China, our trademark applications have faced preliminary refusals because
            there has been a third-party trademark application submitted prior to our application. In most cases, we are requesting a review of these preliminary
            refusals and are opposing and pursuing cancellation actions against those third-party trademarks and trademark applications. The loss, limitation or refusal
            of trademark protection for our brand in any jurisdiction could have a material adverse effect on our business.

            We are subject to patent and other intellectual property litigation.
                   Our business is heavily reliant upon the quality of our products, which in turn are dependent on the underlying software and related technology,
            including communications technology. By its nature, software and related technology is heavily reliant on intellectual property including patents and trade
            secrets. Third parties have from time to time claimed, and it is likely that others will claim in the future, that we and/or our distributors or commercial
            partners have infringed their patents or other intellectual property rights. The application of patent law to the software industry is particularly uncertain
            because the time that it takes for a software-related patent to issue is typically lengthy, which increases the likelihood of pending patent applications
            claiming inventions whose priority dates may pre-date development of our own proprietary software. We are subject to patent disputes, and expect that we
            will increasingly be subject to patent infringement claims as our products and distribution model expand in market share, scope and complexity.

                   Intellectual property claims against us, whether meritorious or not, are time consuming and costly to resolve, could divert management attention and
            financial resources away from our daily business, could require changes in our methods of doing business or our products, could require us to enter into
            costly royalty or licensing agreements or to make substantial payments to settle claims or satisfy judgments, and could require us to cease conducting
            certain operations or offering certain products in certain areas or generally. We do not conduct comprehensive patent searches to determine whether the
            technologies used in our products infringe upon patents held by others. In addition, product development is inherently uncertain in a rapidly evolving
            technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar
            technologies. While we believe that our products do not infringe in any material respect upon intellectual property rights of third parties, we cannot be
            certain that this is the case. In addition, in any potential dispute involving our patents or other intellectual property, our customers and distributors could
            also become the target of litigation. We have certain contractual obligations to indemnify our customers, distributors and commercial partners for liability
            that they may incur based on third party claims of intellectual property infringement for the use of our products or technology. For example, we distribute
            the Skype software client to makers of mobile and computer devices who preload the Skype software client with

                                                                                           31




39 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            their products. In the event that any customer or distributor were subject to a claim that its use or distribution of our products infringed third party
            intellectual property rights, we may be responsible for the defense and costs of such claim, which could result in substantial expenses to us or could
            require us to modify or cease offering certain products in certain areas or generally. In addition, as a result of such claim, any such customer or distributor
            may decide not to use our products in the future, which could harm our results of operations or financial condition.

                   In 2009, we incurred a charge of $343.8 million in our results of operations resulting from the settlement that we and eBay reached with Joltid
            regarding our use of the “Global Index” technology that facilitates communications in the peer-to-peer network of Skype users, which we acquired as part
            of the Joltid Transaction. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key
            Factors Affecting Results of Operations” and “Certain Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid
            Transaction.”

                   To the extent we are subject to litigation, there is a possibility that we may be adversely affected. If we are required to make substantial payments to
            settle legal proceedings or to satisfy any damages that might be awarded by a court, or if a court were to enter an injunction against us, any such
            requirement could have a material adverse effect on our consolidated financial position and results of operations or cash flows.

                  Finally, we may also face infringement claims from the employees, consultants, agents and outside organizations we have engaged to develop our
            technology. While we have sought to protect ourselves against such claims through contractual means, there can be no assurance that such contractual
            provisions are adequate, and any of these parties might claim full or partial ownership of the intellectual property in the technology that they were engaged
            to develop for us.

            Certain of our technology is licensed from third parties.
                  We license technology for certain components of our products from third parties we do not control, such as certain codec licenses used for encoding
            and/or decoding digital data streams and messaging “middleware” licences (used to pass information between servers). Although we have contracts in
            place with our third party technology providers, there can be no assurance that the technology we license will continue to be available on commercially
            reasonable terms, or at all, in the future. While proprietary or open source alternatives may be available in some cases, transitioning to such alternatives
            may take time and be costly. The loss of existing licenses or the unavailability of such alternative technology could result in a decrease in the quality of our
            products or loss of the ability to provide our products until equivalent technology or suitable alternatives can be developed, identified, licensed and
            integrated. For example, we have certain in-bound licenses for video compression codecs and audio compression codecs, on which our products rely.
            Some of these in-licenses have a fixed term and may or not be renewed by the applicable licensor. If we were required to obtain or develop suitable
            alternatives, the costs associated with licensing or developing such alternatives could be high and the technical challenge of assuring “backward
            compatibility” with older versions of our technology may be difficult to overcome and could materially harm our business.

                   Our products and services rely on certain technical standards, among other things, for interoperability of communication of voice and video,
            including standards relating to audio and video compression standards, such as H.264 and G.729. These standards may be covered by patent rights held by
            third parties. The combined costs of identifying and obtaining licenses from all holders of patent rights essential to such standards could be high and could
            reduce our profitability or increase our losses. The cost of not obtaining such licenses could also be high if a holder of such patent rights brings a claim for
            patent infringement. While some such patent holders, based on their involvement with the standard setting organizations, may license relevant technology to
            us under reasonable and non-discriminatory terms, there can be no assurance that all necessary patent rights can be secured under such terms, and we may
            have to pay substantial royalties to secure such patent rights.

                                                                                           32




40 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            We may be unable to protect or enforce our own intellectual property rights adequately.
                  We regard the protection of our trademarks, service marks, copyrights, patents, domain names, trade dress, and trade secrets as critical to our
            success. We seek to protect our intellectual property rights by relying on national, supranational, state and common law rights, as well as a variety of
            administrative procedures. We also rely on confidentiality agreements and other contractual restrictions to protect our proprietary rights and intellectual
            property. These contractual arrangements and the other steps we have taken to protect our intellectual property, however, may not prevent misappropriation
            of our technology or deter independent development of similar technologies by others. For example, we rely on contractual and license agreements with
            our customers, distributors and users of our application programming interfaces in connection with their use of our products and technology, including
            “click-wrap” and “shrink-wrap” licenses with our end user customers, which are not negotiated or signed by individual licensees and therefore may be
            more difficult to enforce or even unenforceable in some jurisdictions. We cannot assure you that our contractual restrictions will not be breached, that we
            will be able to effectively enforce these agreements, that we will have adequate remedies for any breach, or that our trade secrets and other proprietary
            information will not be disclosed or will otherwise be protected.

                   We continue to pursue the registration of certain of our trademarks, service marks, patents, and domain names in the European Union, the United
            States and in certain other jurisdictions. Effective trademark, copyright, patent, domain name, trade dress, and trade secret protection may not be available
            in every country or jurisdiction in which our products may be made available, which may cause our business and operating results to suffer. Where
            effective protection is available, it may be very expensive to maintain and may require litigation, and even then may not be successful in preventing the
            misappropriation of our intellectual property or the development of similar technologies by others.

                   We aim to protect our trademarks from infringement by third parties. However, we evaluate each case independently and we may decide to take less
            stringent enforcement action, or in some cases, no action at all, based on the circumstances. This may dilute our trademark rights, and subject them to
            challenge or invalidation, which could harm our reputation, cause confusion among our users, and undermine the value of our trademarks in the
            marketplace. In the extreme case, this may result in abandonment of our trademarks in jurisdictions where we have not enforced our trademarks diligently.

                  Competitors and other third parties may purchase our trademarks and confusingly similar terms as keywords in Internet search engine advertising
            programs and in the header and text of the resulting sponsored link advertisements in order to divert potential customers to their websites. Preventing such
            unauthorized use is inherently difficult. If we are unable to protect our trademarks and confusingly similar terms from such unauthorized use, competitors
            and other third parties may continue to drive potential online customers away from our websites to competing websites, which could harm our reputation
            and cause us to lose revenue.

                  Third parties have registered domain names that contain the Skype trademark without our consent, and a small proportion of the Skype domain names
            are registered in the names of our former employees rather than in our name. While we are seeking to have these domain names transferred to us, we may
            not be successful and to the extent that Skype domain names are not under our control in certain countries, it could hinder our marketing efforts, cause
            confusion to our users and may harm our reputation in those countries if those domain names are used in ways unrelated to our business or in ways with
            which we would not agree.

                  A number of our patents expire between 2021 to 2026. If we are unable to obtain continuations of such patents upon their expiration, we will lose the
            benefit of exclusive use of the technology covered by these patents. In addition, we have patent applications pending in various jurisdictions, and we
            cannot assure you that our pending applications will be granted. Even if patents are issued from our patent applications, which is not certain, they may be
            contested, circumvented or invalidated in the future. Moreover, the rights granted under any issued patents may not provide us with proprietary protection
            or competitive advantages. Further, the claims under any patents that issue from our applications may not be broad enough to prevent others from
            developing technologies that are similar or that achieve similar results to ours. It is also possible that the intellectual property rights of others will bar

                                                                                         33




41 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            us from licensing and from exploiting any patents that issue from our pending applications. Numerous U.S. and foreign issued patents and pending patent
            applications owned by others exist in the fields in which we have developed and are developing our technology. These patents and patent applications
            might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition to those who may claim
            priority, any of our existing patents or patents that issue from our applications may also be challenged by our competitors or others on the basis that they are
            otherwise invalid or unenforceable.

            We may be unable to protect, or enforce our intellectual property rights in, our source code adequately.
                   Protection of our source code is very important to us. We protect our source code as a trade secret and as a copyrighted work. We distribute our
            products in object code, which is a form of computer software that is executed by computers and does not reveal the structure or logic of the programming
            performed by humans. Our agreements with our customers prohibit reverse engineering of the object code to get access to the source code. Nevertheless, a
            third party might try to reverse engineer or otherwise obtain and use our source code without our permission. The steps taken by us to protect our source
            code may not be adequate to prevent misappropriation. In addition, the laws of some countries in which we sell our product may not protect software and
            intellectual property rights to the same extent as the laws of the United States. Unauthorized copying, use or reverse engineering of our products could have
            a material adverse effect on our business, financial condition and results of operations.

                   Some of our Skype software client includes open source code for ancillary capabilities. However, we believe that there is no obligation to make
            available or redistribute other components of the Skype software as a result of the inclusion of such open source code. In the event that our software
            includes open source code which does in fact introduce such obligations, we may be required to freely provide source code for our products to the extent
            that such code is a derivative work of the open source code for others to use, modify and redistribute according to the open source code license. The terms
            of many open source licenses have not been interpreted by U.S. and other courts, and there is a risk that these licenses could be construed in a manner that
            could impose unanticipated conditions or restrictions on our ability to commercialize our products. If we were found to have violated an open source
            license, the copyright holder for the corresponding open source software may be able to obtain injunctive relief and/or monetary damages against us. In
            addition, open source licenses generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code.
            Thus, we may have little or no recourse if we become subject to infringement claims relating to the open source software that we might use or if such open
            source software is defective in any manner.

            If our business were deemed to be a regulated telecommunications business in one or more jurisdictions, it would significantly increase our
            expenses and may require us to change our products and other aspects of our business in potentially detrimental ways.
                   We operate as a software company and not as a regulated telecommunications company. We are subject to the risk that, due to changes in
            communications, e-commerce and other similar laws and regulations or in the application, interpretation or enforcement of both existing and future
            communications, e-commerce and other similar laws and regulations, we may be required to comply with communications, e-commerce and other similar
            laws and regulations in one or more jurisdictions. In addition, we are continually seeking ways to improve our products and offer them across multiple
            communication platforms, which may involve from time to time upgrades or changes in the technological infrastructure on which our products are based
            and which could result in subjecting our activities to greater regulation in multiple jurisdictions. For example, the rolling out of our Skype for Business
            suite of products in the United States may subject us to a greater risk of regulatory oversight in this country. If we are required to comply with
            communications, e-commerce and other similar laws and regulations, we would need to meet a number of obligations, which could vary from jurisdiction
            to jurisdiction, including new or enhanced compliance in the following areas:
                    •   licensing and notification requirements;
                    •   emergency calling requirements, including enhanced emergency calling through multi-line telephone systems;

                                                                                          34




42 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                    •   universal service fund contribution requirements;
                    •   lawful interception or wiretapping requirements;
                    •   privacy and data retention and disclosure requirements;
                    •   limitations on our ability to use encryption technology;
                    •   disability access requirements;
                    •   consumer protection requirements and local dispute resolution requirements;
                    •   requirements related to customer support;
                    •   quality of service requirements;
                    •   provision of numbering directories;
                    •   numbering rules, including portability requirements;
                    •   directory and operator services; and
                    •   access and interconnection obligations.

                  If we are required to comply with communications, e-commerce and other similar laws and regulations in one or more jurisdictions, it could have the
            following effects, among others:
                    •   the cost and general impact of compliance would be substantial, may require significant investments and organizational changes and may erode
                        or eliminate our pricing advantage over competing forms of communication and, potentially, our ability to compete effectively;
                    •   the cost of compliance may adversely affect our operating margins or profitability or result in net losses;
                    •   compliance may require us to make certain fundamental and potentially detrimental changes to the products we offer and the way we conduct
                        business in certain states, countries or other regions, including withdrawing products and withdrawing from markets;
                    •   compliance may be technically difficult or impossible;
                    •   we may need to change our distribution, marketing and sales activities;
                    •   we may need to terminate or restructure partnerships and other commercial agreements;
                    •   we may need to establish a local presence in any given jurisdiction, sell our products through such local entity and be required to pay new or
                        increased taxes in that jurisdiction;
                    •   we may become subject to additional local laws and regulations by virtue of being subject to communication and other similar laws and
                        regulations, and compliance with those additional laws and regulations may be costly and adversely affect our business; and
                    •   we would need to increase our headcount.

            The regulation of Internet communications products is currently uncertain, which poses risks for our business from changes in laws, regulations,
            interpretation or enforcement of existing laws or regulations.
                   The current regulatory environment for Internet communications products is uncertain. Many laws and regulations were adopted prior to the advent of
            the Internet and related technologies and, as a result, do not contemplate or address the specific issues associated with the Internet and related technologies.
            Laws that do reference the Internet are being interpreted by the courts and regulatory agencies, but their applicability and scope remain largely uncertain
            and are subject to statutory or interpretive change. We cannot be certain that we, our partners or our users are currently in compliance with regulatory or
            other legal requirements in the numerous countries in which Skype is used. Our failure, or the failure of those with whom we transact business or to whom

                                                                                          35




43 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            we license our software, to comply with existing or future regulatory or other legal requirements could materially adversely affect our business, financial
            condition and results of operations. Regulators disagree or may disagree with our interpretations of existing laws or regulations or the applicability of such
            laws or regulations to our business, or they may alter their view of the products we provide, due to a change in laws, regulations or interpretation of
            existing laws or regulations or otherwise. Due to the uncertainty of the regulatory status of Internet communications products in many jurisdictions
            worldwide, we frequently must respond to inquiries and requests from regulators about our regulatory status, which may mobilize internal resources and be
            time-consuming and costly.

                   For example, authorities in Sweden ruled in 2009 and confirmed in 2010 that we were a provider of electronic communications services in Sweden
            and, therefore, subject to a local notification obligation. While we disagree with the ruling of the Swedish authorities, we are however making a number of
            changes as to how we offer our products to Swedish users in response to the Swedish ruling. In addition, the telecommunications regulatory authority in
            Austria formally ruled in 2007 and again in 2008, that provision of the SkypeOut product should be suspended in Austria until we register as an electronic
            communications services provider and comply with local electronic communications regulations. We do not agree with the ruling of the Austrian
            authorities. We have not changed how SkypeOut is offered in response to this ruling and do not believe that any attempt has been made to enforce this
            ruling.

                  There can be no assurance of the views of regulators on the applicability of legal and regulatory requirements to our products in the future or of the
            views of regulators of any actions we have taken or may take in the future in any jurisdiction. If we are ultimately required to comply with these
            requirements, we may need to make changes to our products, processes, organization and infrastructure, which could be costly and difficult.

            We may be subject to laws in multiple jurisdictions.
                   We are incorporated in Luxembourg and generally operate under Luxembourg law. For the purposes of Skype for Business sales to U.S.-based
            business customers, we have also recently started to offer our products through Skype Inc., a Delaware corporation. However, because our products are
            used worldwide, and facilitate communications among users worldwide, one or more jurisdictions (including the state jurisdictions in the United States)
            may claim that we or our users are required to comply with their laws based on the location of our various offices, staff, commercial partners, commercial
            operations, equipment or one or more of our users. Compliance with telecommunications, data retention, privacy, consumer protection and other applicable
            laws and regulations in multiple jurisdictions and states may be complicated or costly or may require us to change our business practices or organization or
            limit the products we offer, and the imposition of any laws and regulations on our users may harm our business. In addition, we may be subject to
            overlapping legal or regulatory regimes that impose conflicting requirements on us. As our business grows and evolves and our products are used in a
            greater number of countries, and as the group of countries in which we employ staff grows, more jurisdictions and states are likely to claim that we are
            subject to their telecommunications, data retention, privacy, consumer protection, financial and other applicable laws and regulations. Any failure to
            comply with local laws and regulations could subject us to penalties ranging from criminal prosecution to significant fines to bans on our products.

            As a precautionary response to the regulatory framework in certain countries, we have limited the manner in which we market and sell our paid
            products. We may decide to alter our business or the products we offer in ways that would make our activities more likely to be subject to
            telecommunications, consumer protection and other local laws and regulations.
                   As a precautionary response to the regulatory framework in certain countries, we have limited localized and offline marketing and sales activities for
            our paid products, such as bill boards or television advertisements. These limits on our marketing and sales activities may make it more difficult to attract
            or retain users or to maintain our brand, which may harm our business prospects. In the future, we may decide to change our business

                                                                                          36




44 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            model or offer products and services in ways that would make our activities more likely to be subject to telecommunications, data retention, privacy,
            consumer protection and other local laws and regulations in multiple jurisdictions and the additional associated costs of compliance and the risks of
            non-compliance. We may choose to do this in one or more selected jurisdictions or generally. The benefits obtained from increased sales and marketing
            may be outweighed by the costs associated with regulatory compliance discussed in “—If our business were deemed to be a regulated business in one or
            more jurisdictions, it would significantly increase our expenses and may require us to change our products and other aspects of our business in potentially
            detrimental ways.”

            In certain countries, we rely on our local partner for regulatory compliance.
                  In certain countries, such as Brazil, China, South Korea and Taiwan, we rely on our local partner for regulatory compliance, including compliance
            with local telecommunications laws and other applicable laws and regulations. For example, our local partner in South Korea (which is a subsidiary of
            eBay) and our local partner in Taiwan hold the governmental license necessary for them to offer our paid products in that country. To address the Chinese
            market, we have a 49% interest in an entity, Tel-Online Limited, and our majority partner, Tom Online, in practice handles relationships with local
            regulatory and law enforcement authorities. If our local partners do not ensure that their operations and our products comply with local law and other
            applicable laws and regulations, we may face additional regulation, liability or penalties or other governmental action for failure to comply with these
            laws and regulations, and our brand and reputation may be harmed as a result of negative publicity resulting from any such failure. Our reliance on our
            local partners to comply with local laws and other applicable laws and regulations could cause also us harm, reputational or otherwise. See “—User
            concerns about our use and protection of personal data and the privacy of their communications could harm our brand and our business.”

            We develop and provide new products and features that may be deemed to be subject to telecommunications and other laws and regulations in
            different jurisdictions.
                  We are developing and have developed new products and features, such as Skype Connect and Skype Manager, that involve from time to time
            upgrades or changes in the technological infrastructure on which they are based and in the way they operate and are offered, which could be deemed to be
            subject to telecommunications and other laws and regulations in different jurisdictions. If such new products and features were deemed to be subject to,
            and we were required to comply with, telecommunications, data retention, privacy, consumer protection and other local laws and regulations in one or
            more jurisdictions, we would need to meet a number of obligations, which could vary from jurisdiction to jurisdiction. See “—If our business were
            deemed to be a regulated business in one or more jurisdictions, it could significantly increase our expenses and may require us to change our products and
            other aspects of our business in potentially detrimental ways.”

            Third parties have raised, and may raise in the future, concerns about the application of regulations to our business.
                  Some third parties, including our competitors, have raised, and may raise in the future, concerns with policymakers and regulators in various parts of
            the world about the application of local laws and regulations to our business. We believe that some of these established businesses (which may include
            incumbent telecommunications companies) and their trade association groups employ significant resources in their efforts to shape legal and regulatory
            regimes and may employ these resources to change legal and regulatory regimes in ways intended to reduce the effectiveness of our business. Most
            incumbent telecommunications companies, landline and wireless, have substantial budgets devoted to lobbying and governmental relations and
            long-standing relationships with regulators and legislators that we, as a newer entrant in the Internet communications market, do not have. Some of these
            incumbent businesses have raised concerns relating to allowing consumers open access to the Internet, the lack of regulatory controls and obligations
            placed on Internet communications products, and the cost advantage this brings to providers of such products. Continuing actions by these competitors or
            trade groups may result in additional jurisdictions requiring us to comply with the local telecommunications and other laws and regulations.

                                                                                         37




45 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            We may be required to comply with emergency calling regulations in certain jurisdictions. Compliance with emergency calling regulations may be
            costly and technically difficult.
                  In many jurisdictions, traditional and replacement telephony service providers and some other forms of communications service providers are
            required to provide customers with emergency calling services (such as dialing 911 in the United States or 112 in the European Union) that route calls
            directly to an emergency services dispatcher in the caller’s area. In some jurisdictions, for example, the United States, these emergency calling services
            obligations also include a requirement that the telecommunications provider provide the location of the person making the emergency call. Our products
            generally do not offer emergency calling services.

                   At the end of 2009, for example, the European Parliament adopted amendments to the E.U. telecommunications regulatory framework that will
            require changes to be made to communications laws of the 27 E.U. Member States by May 2011. Under the E.U. directive, home country legislation must
            provide that any electronic communications service designed for originating calls must provide “reliable and accurate” access to emergency services
            through emergency numbers. Although it is currently uncertain how each Member State will implement these amendments and whether these amendments
            will apply to our operations, we may be required to comply as and when implementing legislation is introduced in the E.U. Member States. We have
            voluntarily begun to provide a basic level of emergency calling functionality without location information in the United Kingdom. In late 2010 and in 2011,
            we intend to implement a similar voluntary basic level of emergency calling functionality in Australia and certain Nordic countries, and we may voluntarily
            offer certain emergency calling services in other jurisdictions in the future.

                   Unlike landline phones, where the telephone is located at a fixed address, or mobile phones, which can be located using triangulation of cell towers
            or GPS technology in the handset, we are unable to determine the exact location of a caller who uses our products to make a call over the Internet. Our
            customers have the ability to use our products nomadically, meaning that they can log in and use our products from virtually any Internet connection
            worldwide. They can also log in on up to five devices simultaneously at a variety of locations. Although we have the limited ability to identify the
            registered user using our products to make a call (based on information voluntarily provided to us when the user first registered with us), we cannot
            determine the actual location from which a call is originated. Additionally, due to the inherent nature of transmission via the Internet, we are unable to
            guarantee completion of any call, including a call to emergency services. The E.U. telecommunications framework amendments also include a provision
            that, once internationally recognized standards ensuring accurate and reliable routing and connection to the emergency services are in place, “network-
            independent” providers, such as Skype, should also fulfill the obligations related to caller location information at a level comparable to that required of
            other providers. To date, in places where we have enabled and will enable this functionality, we are still unable to identify reliably the geographic
            location of the user beyond the country level or to provide detailed caller information, and the user location information is not being provided to our
            carrier partners or emergency call centers in connection with the call.

                  If we were required to comply fully with all emergency calling service requirements, which vary from jurisdiction to jurisdiction, it would be costly
            and technically and administratively difficult or impossible. Compliance with these regulations may require us to alter or limit our products in certain
            jurisdictions or otherwise change the way we do business in those jurisdictions.

            If we were required to contribute directly to universal service funds, the cost of providing our products would increase, and if we were to seek to
            recover the increased cost from our customers, the cost advantage of using our products would be reduced.
                  Certain countries, including the United States, France, Spain, Canada, Australia, India, Japan, Hong Kong, South Korea and Taiwan, as well as
            several states within the United States, have adopted laws that allow regulatory authorities to require telecommunications providers to contribute to a
            universal service fund, or USF, that is imposed by law and applied through regulation to facilitate access to telecommunications services by all

                                                                                         38




46 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            potential users. For example, in the United States, the U.S. Federal Communications Commission requires certain telecommunications carriers or
            interconnected voice over Internet protocol providers to contribute a percentage of their interstate revenues to the federal universal service fund. The
            percentage is adjusted periodically and was 13.6% of interstate revenue as of June 30, 2010. Currently, we rely on our carrier partners, which are
            telecommunications providers, to make any federal universal service fund payment applicable to our paid products. From time to time we have received,
            and may continue to receive, inquiries from regulators relating to the applicability of the universal service fund to our paid products. We respond to these
            inquiries in the ordinary course, stating that direct universal service payment requirements are not applicable to our products. In the United States, for
            example, the federal universal service fund only applies to telecommunications services and interconnected voice over the Internet protocol services, a
            category of services we believe would not include our paid products. If we were required to contribute directly to any universal service funds, including
            due to a change in laws or regulations or a change in interpretation of current laws or regulations, the cost of providing our products would increase. If we
            became subject to any such laws or regulations, we might seek to collect universal service fund contributions from our customers or alternatively recover
            increased costs through rates we charge for calls; however, that would increase the cost of our products to our customers and could reduce demand for our
            products. In addition, if we were required to make universal service fund contributions based upon a change in interpretation of a current regulation, the
            requirements for the contribution might be imposed on us retroactively, in which case we would be unable to recover costs relating to past calls from our
            customers. Retroactive application of these laws could also require us to make significant payments, which could harm our results of operations or
            financial condition.

            Compliance with requests from law enforcement agencies and compliance with data disclosure and lawful interception laws is costly and difficult
            and might subject us to conflicting obligations and result in improper interpretation and application of complex laws.
                  Communications companies are subject to various regulations that require them to assist law enforcement and intelligence agencies with access to
            personal and traffic data and lawful interception of certain of their services and products. The scope of applicability and level of sophistication of such
            regulations vary greatly from country to country. We have been and may in the future be asked to disclose historic personal and traffic data to various law
            enforcement agencies. In addition, various authorities could consider that we are subject to lawful interception laws, and we have been contacted from
            time to time by a number of authorities in relation to our ability to intercept, trace or identify our users’ communications. To the extent that our products and
            operations are or were found to be or would become subject to lawful interception laws in any jurisdiction, we would need to adapt our systems and
            processes to comply with a variety of requirements on a jurisdiction-by-jurisdiction basis, which can be very costly and technically difficult. Furthermore,
            such requests by law enforcement and other authorities can make us subject to potentially conflicting obligations across jurisdictions. In addition,
            determining whether compliance is legally appropriate in any particular case could require us to exercise judgment and result in improper interpretation
            and application of complex laws. Compliance with data disclosure and legal interception orders may also conflict with certain local laws, including laws
            governing privacy.

            Compliance with data retention laws is difficult and costly.
                   Many countries, such as the E.U. Member States via the 2006 E.U. Data Retention Directive, are introducing, or have already introduced, into local
            law some form of traffic and user data retention requirements, which are generally applicable to providers of electronic communications services.
            Retention periods and data types vary from country to country, and the various local data protection and other authorities may determine their jurisdiction
            with respect to certain data in different and potentially overlapping manners. We may be subject to data retention obligations in one or more jurisdictions,
            and we could become further subject to these obligations through changes to our product offerings or as result of modifications to our products or changes
            to the technological infrastructure on which our products are based or otherwise. Compliance with those laws can be difficult and costly to our activities
            from a legal, operational and technical perspective.

                                                                                           39




47 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Telecommunications numbering rules could require us to change the manner in which we use or contract for numbers, or require that we
            suspend, withdraw or otherwise limit number-based products.
                   In the jurisdictions where we enable the provision of numbers for our SkypeIn or Skype to Go products, changes in the numbering rules or changes in
            their interpretation or enforcement could require us to change the manner in which we use or contract for numbers, or require that we authorize transfers (or
            provide portability), suspend, withdraw or otherwise limit number-based products in affected markets, potentially resulting in customer claims and loss of
            customers, regulatory disputes, limitations to future local operations, including limitations on the usage of numbers and access to carrier partners,
            negatively impacting the Skype brand, products, carrier and other partnerships, operations and regulatory positioning in the relevant jurisdictions. See
            “Business—Regulation.”

            Regulation on import, export and distribution of highly encrypted technologies can pose risks for our business.
                  In some countries, the export, import and distribution (online and offline) of highly encrypted technologies, such as our software application, are
            subject to licenses, authorizations or permissions by relevant local authorities. In 2006, we obtained an authorization from the U.S. Department of
            Commerce for the export of Skype software. If we are not able to obtain, maintain or update import, export and distribution authorizations and licenses in
            countries that require them, it may negatively impact the distribution, availability and use of our products and our partners’ products in such countries and
            subject us to penalties ranging from criminal prosecution to fines or bans on the distribution of our products.

            Compliance with disabilities access regulations could be technically difficult and could impose significant additional costs on our operations.
                   In some jurisdictions, telecommunications services, website and software providers are subject to various rules to ensure that their sites and
            products are sufficiently accessible to people with disabilities, such as visual impairment. These rules are designed generally to ensure that people with
            disabilities can access the features of websites or software in a functionally equivalent manner as compared to people without disabilities. For example,
            legislation proposing new or additional disability access obligations on software providers is pending in the U.S. Congress. Changes in these obligations
            may impact the way we develop, and the usability of, our software. Similarly, the European Commission is becoming more active in this area, and
            requirements for functional equivalence were adopted in the review of the E.U. electronic communications regulatory framework agreed at the end of 2009.
            Depending on how the revised provisions are adopted by individual E.U. Member States, requirements to implement disabilities access requirements on
            part or all of our website and one or more of our products could be technically difficult to comply with and could impose significant additional costs on
            our operations.

            If our online credits were regulated as a currency or if we were regulated as an electronic money lending institution or similar entity, we would
            face additional compliance costs.
                   Our customers purchase online prepaid credits to buy and use our paid products, which we refer to as Skype Credit. If existing laws and regulations
            that apply to currencies, currency issuing activities or electronic money (e-money) were interpreted by regulators to apply to Skype Credit or us, or if new
            laws or regulations were adopted that would cause Skype Credit to be regulated as a currency, e-money or financial service generally or if we were
            regulated as an electronic money lending institution, we could be required to comply with those laws and regulations and any such compliance may be
            costly. For example, if Skype Credit were regulated as a currency or as e-money or if we were regulated as an electronic money lending institution or
            credit issuer, we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us
            meeting certain capital and other prudential requirements; we may be subject to additional oversight of our business; and we may be required to comply
            with conduct of business rules, including disclosure requirements and anti-money laundering and know-your-customer rules, all of which could
            significantly increase our operating costs.

                                                                                          40




48 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                   For example, in 2009, the Japanese Financial Services Act was amended establishing new conditions requiring companies that offer pre-paid credit
            to register as an issuer of credit and post a bond, for example by establishing a trust fund, amounting to a minimum of 50% of the total of the value of the
            outstanding amount of credit. While we believe that we do not conduct operations in Japan, if we were ultimately required to comply with the new
            provisions of the Japanese Financial Services Act, compliance could be costly and difficult.

            Certain countries are reported to have prohibited or blocked the use of our products; however, consumers in those countries may continue to use
            our products, which may cause these countries to impose penalties on us or take other governmental action against us, any of which may harm our
            business.
                  Certain countries have made the use of one or more of our products illegal or are reported to have prohibited or blocked access to our website. For
            example, the United Arab Emirates is reported to have banned the use of our products and the accessibility of our website in its territory. In addition, in
            March 2010, the Egyptian National Telecommunication Regulatory Authority (“NTRA”) announced that it was banning Skype when accessed on mobile
            devices, citing an Egyptian law that international calls must pass through an international long distance gateway controlled by a license holding Egyptian
            company. However, we believe, following clarification from the Communications Ministry, that Skype products are authorized to be accessed through
            fixed broadband and fixed and mobile WiFi Internet connections in Egypt. Even where our products are reportedly illegal or become illegal and access to
            our website is impaired, users in those countries who continue to have access to our software may be able to continue to use our products in those countries
            notwithstanding the illegality of doing so. We may be subject to penalties or governmental action if consumers continue to use our products in countries
            where it is illegal to do so, and any such penalties or governmental action may be costly and may harm our business.

            Because we are not a regulated telecommunications provider, we do not receive certain protections that regulated telecommunications providers
            receive.
                   In a number of jurisdictions, “interconnected VoIP” companies are exempt from liability for failure of emergency calling services. In the United
            Kingdom, we voluntarily offer certain limited emergency calling services and intend to voluntarily offer certain emergency calling services in other
            selected jurisdictions in the future. In jurisdictions where we offer emergency calling services, we may be responsible for potential limitations and failures
            in the provisions of such services, and we may not have the benefit of any exemptions from liability that may be provided to regulated telecommunications
            providers. The unavailability of this exemption may expose us to liability from customers who suffer personal injury or other damages as a result of using
            our emergency calling services. Any such liability could be significant.

            Our business depends on our users having continued and unimpeded access to the Internet. Companies providing access to the Internet may be
            able to block or degrade our calls, or block access to our website or charge us or our users additional fees for our products.
                  Most of our users rely on open, unrestricted access to the Internet to use our products. In many cases that access is provided by companies that
            compete with at least some of our products, including incumbent landline telephone companies, cable television system operators, mobile wireless
            communications companies, and large Internet service providers. Some of these providers have stated that they may take measures that could block,
            degrade or otherwise disrupt our calls, or increase the cost of customers’ use of our products by restricting or prohibiting the use of their lines or access
            points to the Internet for our products, by filtering, blocking, delaying, or degrading the packets of data used to transmit our communications, and by
            charging increased fees to our users for access to our products. For example, in June 2010 AT&T in the United States and carrier partners in the United
            Kingdom introduced tiered priced data plans for the iPhone setting monthly data usage limits, with iPhone users incurring overcharges above those quotas,
            which may diminish the attractiveness of our products on the iPhone as users increase their data use. In addition, these Internet access providers may limit
            the ability of our existing or prospective users to gain access to our website to download our software or purchase Skype Credit.

                                                                                         41




49 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                  Some Internet access providers have additionally, or alternatively, contractually restricted their customers’ access to Internet communications
            products (which would include Skype) through their terms of service. For example, SFR in France and Vodafone in Germany contractually prohibit their
            customers from using voice over the Internet protocol services on the Apple iPad 3G. T-Mobile in Germany and Vodafone in France and the United
            Kingdom have established special additional tariffs for voice over the Internet protocol. Customers of these and other Internet access providers may not be
            aware that technical disruptions or additional tariffs are the act of other parties, which could harm our brand. Even if customers understand that we are not
            the source of such disruptions, they may be less likely to use our products as a result.

                   Our products may also be blocked or degraded by firewalls or other measures implemented to protect private networks maintained by enterprises,
            governmental bodies or others, and certain of these entities may take steps to prevent their employees and other users of their networks from using Skype
            products. Interference with our products or higher charges for access to our products, whether paid by us or by our customers, could cause us to lose
            existing customers, impair our ability to attract new customers, and harm our revenues and growth.

                  In the United States, the European Union and other jurisdictions, regulatory authorities are in the process of examining the adoption of “network
            neutrality” policies, which aim to treat all Internet traffic equally, and developing or considering laws and regulations to codify acceptable behaviors on
            the part of network operators and access providers when providing consumers and businesses with access to the Internet. Different regulatory authorities
            have different approaches to this policy area both from a substantive and procedural perspective. Any failure on the part of regulatory authorities to protect
            the accessibility of the Internet to all, or any particularly category of, Internet subscribers, or their failure to protect the delivery on a non-discriminatory
            basis of user communications over the Internet, regardless of type or service, could harm our results of operations and prospects.

            We depend on key personnel.
                   Our future performance depends substantially on the continued services of our senior management and other key personnel, including our engineers,
            and our ability to retain and motivate them. We do not have long-term employment agreements with any of our key personnel and we do not maintain any
            “key person” life insurance policies. The loss of the services of any of our executive officers or other key employees could harm our business, as could the
            loss of certain groups of engineers. Our business depends on attracting and retaining key personnel. Our future success also will depend on our ability to
            attract, train, retain and motivate highly skilled engineering, technical, managerial, marketing and customer support personnel. Competition for these
            personnel is intense, and we may be unable to successfully attract, integrate, or retain sufficiently qualified personnel. In making employment decisions,
            particularly in the Internet and high-technology industries, job candidates often consider the value of the equity awards they would receive in connection
            with their employment. If our employees have substantial in-the-money, vested options or other equity awards it may be difficult to motivate and retain
            those employees. Conversely, if options granted to our employees have exercise prices that are substantially “under water,” meaning that the option
            exercise price is above our then-current ordinary share price or ADS price, it may be difficult to motivate and retain those employees. Likewise, if the
            market price of our ordinary shares or ADSs does not increase or declines, it may limit our ability to attract new employees with equity incentives.

            Our senior management has limited experience working together as a group and may not be able to manage our business effectively.
                  Many of the members of our senior management, including our Chief Financial Officer, Chief Marketing Officer and Chief Legal Officer, have been
            hired since March 2010. As a result, our senior management has limited experience working together as a group. This lack of shared experience could
            harm our senior management’s ability to quickly and efficiently respond to problems and effectively manage our business. If our senior management is not
            able to effectively work together as a group, our results of operations may suffer and our business may be harmed.

                                                                                           42




50 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Rapidly evolving technologies could cause demand for our products to decline or could cause our products to become obsolete.
                   Current or future competitors may develop technological or product innovations that address Internet communications in a manner that is, or is
            perceived to be, equivalent or superior to our products. In the technology market in particular, innovative products have been introduced which have the
            effect of revolutionizing a product category and rendering many existing products obsolete. If competitors introduce new products or services that compete
            with or surpass the quality or the price/performance of our products, we may be unable to attract and retain users or to maintain or increase revenues from
            our users. We may not anticipate such developments and may be unable to adequately compete with these potential solutions. As a result of these or similar
            potential developments, in the future it is possible that competitive dynamics in our market may require us to reduce prices for our paid for products, which
            could harm our net revenues, gross margin and operating results or cause us to incur losses.

            Errors in our products could harm our business.
                   Our software, products and website could contain undetected errors or “bugs” that could adversely affect their performance. We regularly update
            and enhance our software and website and introduce new versions of our software, which often results in errors. The prevalence of software bugs is
            typically higher in the context of releases of new generations of software than in the releases of more modest version upgrades. The occurrence of errors in
            our software, products or website may cause us to lose users, damage our reputation and brand name, and materially and adversely affect our business. In
            addition, as our users increase their use of our paid for products, they may have higher expectations for these products than for free products. Also, as we
            increasingly introduce products particularly targeted at business users, we may find that business users have more demanding expectations than individual
            users, and even minor errors in our software could deter business users.

            System failures could harm our business.
                   Although we seek to reduce the possibility of disruptions or other outages, our service may be disrupted by problems with our technology and
            systems, such as malfunctions in our software or other facilities and overloading of our network. We have experienced system failures from time to time,
            and any interruption in the ability of users to use our products would reduce our current net revenues, could harm our future net revenues, and could subject
            us to regulatory scrutiny. System failures can result from errors in our software. In August 2007, we experienced an interruption with the peer-to-peer
            network of our users as a result of an unanticipated feature of our software during which the majority of our users were unable to use our products for
            approximately two days. We experienced significant adverse publicity and lost net revenues as a result of this outage, and any similar outage in the future
            would likely harm our business. As we increasingly introduce products particularly targeted at business customers, any system failures could have a
            significant impact on our ability to attract or maintain our relationships with business customers. In addition, the servers that process user payments
            experience some downtime on a regular basis and during these times our customers cannot make SkypeOut calls, which may result in lost revenues and may
            negatively impact our brand and customer perception of the reliability of our products. Any scheduled or unscheduled interruption in the ability of
            customers to use our products could result in an immediate, and possibly substantial, loss of revenues.

                   Our systems may be vulnerable to damage or interruption from telecommunications failures, computer denial-of-service attacks, power loss,
            computer viruses, earthquakes, floods, fires, terrorist attacks and similar events. Some of our systems are not fully redundant, and our disaster recovery
            planning is not sufficient for all eventualities. Our systems are also subject to break-ins, sabotage, and acts of vandalism. Despite any precautions we may
            take, the occurrence of a natural disaster, a decision by any of our third-party hosting providers or telecommunications reseller partners to close a facility
            we use without adequate notice for financial or other reasons, or other unanticipated problems at our hosting facilities could result in lengthy interruptions
            in the availability of our products. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions
            in the availability of our products as a result of system failures.

                                                                                          43




51 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                   Our customers (particularly those who use our products for business, which is an area where we are seeking to increase our penetration) may use our
            products for critical transactions and communications. As a result, any system failures could result in damage to our customers’ businesses. These
            customers could seek significant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly
            for us to address.

            Our business depends on the continued reliability of the Internet infrastructure.
                  Unlike traditional communications products, our users rely on the Internet to communicate via Skype. Increasing numbers of users and increasing
            bandwidth requirements may harm the performance of the Internet. In addition, if Internet service providers and other third parties providing Internet
            services have outages or deteriorations in their quality of service, our customers will not have access to our products or may experience a decrease in the
            quality of our products. Furthermore, as the rate of adoption of new technology increases, the networks on which our products rely in certain countries may
            not be able to sufficiently adapt to the increased demand for their products and services. Frequent or persistent interruptions could cause current or
            potential users to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our products, and could permanently harm
            our reputation and brands.

            Use of our products for illegal purposes could harm our business or brand.
                   We may be unable to prevent our users from using our products in an unlawful manner, and we may be subject to allegations of civil or criminal
            liability for unlawful activities carried out by users through the use of our products. We may be obligated to expend resources to attempt to prevent illegal
            activities. In a number of circumstances, third parties have alleged that our products facilitate and enable certain violations of certain laws, such as
            anti-spamming (i.e., the sending of spam through instant messages), promulgation of unlawful or illegal content and other criminal and terrorist activities.
            Our products may be used for criminal or terrorist purposes, and any high-profile criminal or terrorist action organized through the use of our products
            could result in adverse media attention that could damage our reputation or cause governments to obligate us to enable communications via our products to
            be intercepted and decrypted, which would be costly and technically difficult. In addition, users may register with a Skype Name that a third party believes
            infringe its intellectual property rights (e.g., cybersquatting). If any of these third parties were to seek to hold us responsible for any alleged direct,
            contributory or indirect intellectual property infringements, defending against such claims could be costly and time consuming. Any costs incurred as a
            result of potential liability relating to unlawful activities conducted through the use of our products could harm our business. In addition, negative publicity
            relating to such unlawful activities could damage our reputation, diminish the value of our brand and make users less likely to use our products.

            Our business is subject to online security risks, including security breaches and identity theft.
                   To succeed, providers of online products must provide a secure transmission of confidential information over public networks. Our security
            measures may not detect or prevent security breaches that could harm our business. Currently, a significant number of our users authorize us to bill their
            credit card accounts directly. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication
            designed to secure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries
            in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect transaction data. In
            addition, any party who is able to illicitly obtain a user’s password could access the user’s Skype account, including any personal data contained in the
            account, and misappropriate payment data to make payments and funding calls. An increasing number of websites have reported breaches of their security.
            Any compromise of our security could harm our reputation and, therefore, our business, and could result in a violation of applicable privacy and other
            laws. In addition, a party that is able to circumvent our security measures could misappropriate proprietary information, cause interruption in our
            operations, damage our users’ computers, or otherwise damage our reputation and business.

                                                                                          44




52 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                  Our users, as well as those of other Internet companies, have been and will continue to be targeted by parties using fraudulent “spoof” and “phishing”
            emails to misappropriate passwords, credit card numbers, or other personal information or to introduce viruses through “trojan horse” programs to our
            users’ computers. These emails appear to be legitimate e-mails sent by us, but direct recipients to fake websites operated by the sender of the email or
            request that the recipient send a password or other confidential information via email or download a program. In addition, “spam” e-mails, unwanted and
            unsolicited communications from one user to another, have been sent abusively via our network, recently from a group of individuals acting in concert.
            Spam e-mails are generally phishing emails or seek to sell products or services. Spoof, phishing and spam pose a serious problem that may damage our
            brand, discourage use of our website, and increase our costs.

                  Certain third parties have established websites to attempt to fraudulently charge consumers for our free software. While we are attempting to prevent
            the operation of these fraudulent websites, we may not be successful. These fraudulent websites may damage our brand and may increase our expenses as
            we monitor and take steps with respect to these sites as appropriate.

                  Our or third party servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, and we have
            experienced “denial-of-service” type attacks on our system that have attempted to make all or portions of our websites unavailable for periods of time. We
            may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any
            breach by us or by parties with which we have commercial relationships that result in the unauthorized release of our users’ personal information, could
            damage our reputation and expose us to a risk of loss or litigation and possible liability. Insurance policies covering our business, when they are available,
            may not adequately reimburse us for losses caused by security breaches.

                  For example, an individual has recently been able to reverse engineer parts of our protocol, emulate our Skype software client on the peer-to-peer
            network of our users and perform such functions as log-on, search, instant messaging or sending contact requests. We believe that the privacy of our users’
            communications, which are encrypted, is currently not compromised, and that the components of our Skype software client relating to voice or video calls
            have not been reverse engineered. However, we have observed that this reverse engineering activity has been used to send spam via instant messaging on
            the peer-to-peer network of our users. In addition, we are aware that the results of this reverse engineering has been leaked, both inadvertently and
            deliberately, increasing the likelihood that others will attempt to interact with the network of our users emulating legitimate clients, including for malicious
            purposes such as spamming.

            The peer-to-peer architecture of our software may create, or may be perceived as creating, additional security risks and system constraints.
                   Due to the peer-to-peer architecture of our software, our software utilizes small amounts of the processor and Internet bandwidth of users’ computers
            (or other applicable devices), making them “relay nodes” or “super-nodes” in the peer-to-peer network. Super-nodes allow users’ computing and mobile
            devices to find other connected users. Relay nodes relay communications between other Skype users when direct, peer-to-peer communication is not
            possible. In most cases, users must allow their computing devices’ resources to be used in order to use our software. Users may discontinue using our
            products based on concerns about a portion of the resources of their computing power and their Internet bandwidth being used by our products or privacy
            or security concerns relating to being connected to other users through the peer-to-peer community. Managers of some large networks in businesses and
            large institutions may refuse to allow the use of our products due to concerns over security or bandwidth usage or for other reasons. The perception that our
            software is unsafe could hamper its adoption, and any actual security breach could damage our reputation and expose us to a risk of loss or litigation and
            possible liability.

                                                                                           45




53 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Failure to deal effectively with fraudulent transactions would increase our loss rate and could increase expenses, result in the loss of our ability to
            accept certain credit cards and harm our business.
                   We must remit payment to credit card companies for transactions due to fraud or other reasons, a process to which we refer as “chargeback.” In that
            regard, we estimate that for the pro forma year ended December 31, 2009 and the six months ended June 30, 2010, our losses resulting from chargebacks
            were $5.8 million and $1.7 million, respectively. Identity thieves and those committing fraud using stolen credit card or bank account numbers can
            potentially steal large amounts of money using our products. We have become aware of certain fraudulent activities involving the creation of a significant
            number of spurious user accounts. These criminals create new accounts, purchase Skype’s prepaid calling credit, which we refer to as Skype Credit, for
            each new account using a stolen credit card number or bank account information, and then establish their own 900 numbers to charge amounts from these
            stolen credit cards back to their own accounts or sell the Skype Credits to other consumers who use them to make SkypeOut calls. We pay a fee for
            SkypeOut calls to enable that call to be made to a landline or mobile phone on that network. We refer to this fee as a “termination fee,” and it is usually
            charged based on the duration of the call. When fraudulent Skype Credits are used to make SkypeOut calls, we are required to pay these termination fees,
            which adversely affects our results of operations. When credit card charges by users are disputed by the credit cardholder for fraud reasons or otherwise,
            the credit card company will require us to remit back to them the payment we received. These credit card companies also charge us a processing fee for all
            chargebacks. In those cases, we must pay this processing fee, which adversely affects our results of operations. In addition, it often takes several payment
            cycles for credit card companies to detect fraudulent activity, which can further increase chargebacks and related processing fees.

                  Our subscription plans may also be the subject of fraudulent activity. While the subscription plans that we offer are subject to fair use policies that
            require that the plan be used only by the individual customer, we are aware that users have violated these policies by allowing multiple people to use the
            same plan. Because our software allows users to log on to up to five devices simultaneously, it is difficult for us to detect and prevent this type of
            fraudulent activity.

                   Fraudulent schemes are constantly evolving which makes it difficult for us to detect and prevent them. We expect that technically knowledgeable
            criminals will continue to attempt to circumvent our anti-fraud systems using increasingly sophisticated methods. Measures we take to deter or prevent
            fraud (such as limiting the use of Skype products to call 900 numbers or limiting the amount of Skype Credit that a user can purchase to a small amount, like
            $10) may reduce the convenience or simplicity of our products or make it more difficult to purchase and use Skype Credit, which may make our products
            less attractive to customers.

                   In addition to the direct costs of losses from credit card chargebacks, if these chargebacks become excessive, we would face higher credit card
            processing fees and could potentially lose the right to accept credit cards for payment. Under credit card rules and our contracts with our card processors,
            if there is a breach of credit card information that we store or if we fail to maintain compliance with the Payment Card Industry data security standard, even
            if there is no actual compromise of customer information, we could be liable to the credit card issuing banks for their cost of issuing new cards and related
            expenses and could lose the right to accept credit cards for payment.

            There are many risks associated with offering products worldwide.
                   Our products are available in almost every country where the public Internet is accessible. In certain cases, our partners localize our products to take
            account of local language, culture, standards, and policies. In addition, we may choose to partner with a third party in certain countries, which could result
            in an increase in distribution expenses payable or sharing of revenue with these partners. In certain countries, we or our local partner may be required to
            obtain relevant licenses or registrations to offer communication products in such country, and without such licenses or registrations we or our partner may
            be unable to offer certain of our products in those countries. As a consequence, we might have to suspend or withdraw products or operations that relate to
            such country or could be subject to penalties, which could harm our business.

                                                                                          46




54 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                               http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                  In many countries, we compete with local companies that understand the local market better than we do and have greater local political and
            economic power. We may not be successful in achieving consumer acceptance of our products in particular international markets or in generating net
            revenues from those markets.

                   In emerging markets, there may be constraints on the abilities of local users to purchase Skype Credit. In these markets, we may need to partner with
            local payment providers to permit local users to purchase Skype Credit. These arrangements may be difficult to establish due to potentially conflicting
            sales and value added tax rules, potential requirements for telecommunications licenses and other local laws and requirements. We also face additional
            costs in these markets as we localize our products, including enabling payment for our products in the local currency.

                  In addition to the risks discussed elsewhere in this section, we are subject to risks of doing business worldwide, including the following:
                    •   greater liability or legal uncertainty as a result of legal systems that are less developed with respect to the Internet and Internet
                        communications, unique local laws, conflicting court decisions and lack of clear precedent or applicable law;
                    •   cultural ambivalence towards, or non-acceptance of, our products;
                    •   laws that limit or prohibit foreign ownership of certain businesses;
                    •   inconsistency among laws of various jurisdictions;
                    •   different employee/employer relationships and the existence of workers’ councils;
                    •   the need to comply with anti-bribery and anti-corruption laws and regulations;
                    •   the need to comply with applicable sanctions laws and regulations worldwide;
                    •   difficulties in staffing and managing foreign subsidiary offices;
                    •   different accounting practices and greater problems in collecting accounts receivable;
                    •   restrictions or taxes on the repatriation of capital, withholding taxes and foreign currency exchange restrictions;
                    •   volatility in a specific country’s or region’s political, economic or military conditions; and
                    •   lack of transparency or rule of law.

            User concerns about our use and protection of personal data and the privacy of their communications and data protection breaches could harm
            our brand and our business.
                   Certain of our users, particularly those in the United States and Europe, have strong expectations about the confidentiality of their personal data and
            the content of their communications. Negative publicity regarding actual or perceived intrusions on our users’ privacy could harm our brand and reduce
            demand for our products. For example, in China, Tom Online, the majority investor in Tel-Online Limited in which we hold a 49% interest, has added
            filtering technology to the localized version of our product that allows instant messages to be filtered and stored along with related data based on content.
            We understand that Tel-Online Limited is obligated by the government to provide this filtering and storage. We received significant negative media
            attention as a result of these practices and a related security failure relating to the storage of these instant messages. Further news reports concerning
            content filtering and the apparent lack of privacy of communications in China and other countries are attracting political attention in the United States and
            Europe. Such attention could develop into legislative action resulting in additional legal requirements being imposed on us.

                   We make available on our website our privacy policy, which describes how we use, store and disclose our users’ personal and traffic data. In
            addition, details of how we use our users’ personal data are maintained on a public register in Luxembourg. We have made various international data
            transfers to our partners and suppliers

                                                                                            47




55 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            located outside the European Union. International transfers of data may require prior approval from regulatory authorities in Luxembourg and other
            administrative or contractual measures to be put in place. Increased operations worldwide or changes to the location of our suppliers may result in an
            increased administrative burden in dealing with international data transfers. Data protection and related laws and regulations that apply or may apply to an
            Internet communications company like Skype with users and partners in multiple jurisdictions can be unclear and overlapping, requiring interpretation
            where precedents are not available and creating uncertainty and potential conflicts of law. Moreover, changes or upgrades to our products or technological
            infrastructure on which our products, or the introduction of new products, are based could result in our activities being subject to data protection, data
            retention and related laws and regulations in multiple jurisdictions, increasing uncertainty as well as potential overlap and conflicts of law. In addition,
            certain jurisdictions, such as the European Union and the United States, have new or pending privacy legislation that would require notification of
            consumer data breaches and other privacy protections. Any failure, or perceived failure, by us to comply with our posted privacy policy or with any legal
            or regulatory requirements relating to privacy in one or multiple jurisdictions could result in proceedings or actions against us by governmental entities or
            others and subject us to significant penalties and negative publicity.

                  In addition, communications companies are subject to various additional data security, privacy, data retention and disclosure laws and regulations
            locally, some of which conflict across jurisdictions. If communications laws and regulations were found to be applicable to us, it would be difficult for us
            to comply with them.

                  While some of these privacy requirements apply to our business in Luxembourg and in the United States (with respect to United States based users of
            Skype for Business), complying with all of these various requirements on a jurisdiction-by-jurisdiction basis would impose additional costs on our
            operations and would be difficult and costly.

            Acquisitions and other strategic transactions could result in operating difficulties, dilution, and other harmful consequences.
                   We periodically evaluate and consider a wide range of potential strategic transactions, including business combinations and acquisitions of
            businesses, technologies, services, products and other assets. Any of these transactions could be material to our financial condition and results of
            operations. We may not realize the anticipated benefits of any of these transactions, or may not realize them in the time frame expected. We may also
            experience difficulties in integrating the operations and employees of any acquired businesses and in retaining and motivating key personnel from these
            businesses. Any of these transactions may divert management’s attention, disrupt our ongoing operations, increase our expenses and adversely impact our
            business and results of operations. In addition, acquisitions of foreign operations involve additional risks, including the need to integrate operations across
            different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries. Any
            acquisitions or strategic transactions may require us to issue additional equity securities, which could be dilutive to our shareholders, spend our cash, or
            incur debt, liabilities, amortization expenses related to intangible assets or write-offs of assets or goodwill, any of which could adversely affect our results
            of operations and harm our business.

            We do not have operational control over entities and strategic alliances in which we hold a minority interest and the conduct of the controlling
            partner in such arrangements may harm our reputation or adversely affect the value of our investment and may limit our ability to offer our
            products in certain markets directly or through other third parties.
                  We have and may in the future acquire minority equity interests in entities and enter into strategic alliances, in which we lack management and
            operational control. For example, to address the Chinese market we have a 49% equity interest in an entity in which Tom Online has a majority stake.
            Minority investments involve risks. The controlling partner in such entities and alliances may have business interests, strategies or goals that are
            inconsistent with ours, including with respect to customer relations, investments, marketing and other business

                                                                                          48




56 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            initiatives, interactions with local governments and competitors, and business decisions. Actions or omissions of the controlling partner or the entity in
            which we have an interest may result in harm to our reputation or adversely affect the value of our investment. Our partners may go bankrupt, which may as
            a practical matter subject us to such partners’ liabilities in connection with the entity in which we have an interest. In addition, entities in which we hold a
            minority interest or other strategic relationships may be exclusive in certain countries or regions, which may limit our ability to offer our products directly
            or through another third party in that geography.

            Our SkypeIn and Skype To Go businesses are highly dependent on partners in different jurisdictions, and the conduct, business practices and
            financial health of those partners expose us to potential risks that could harm our reputation and adversely affect our products in those
            jurisdictions.
                   The offer of number-based products by Skype is highly dependent on our operator partners providing us the numbers in different jurisdictions. The
            SkypeIn product, which assigns a number to a user who can then receive calls on his or her computer or other Internet-connected device from a landline or
            mobile phone, and the Skype To Go business, which uses numbers to allow users to access the Skype calling functionality from any phone, are our two key
            products using numbers. Numbers are contracted under commercial arrangements with third party telecommunications operators, who generally have
            obtained the numbers directly from the relevant numbering authorities. In most of the countries in which we offer SkypeIn or Skype To Go products, we
            rely on one partner for the provision of numbers. In certain markets, the SkypeIn or Skype To Go numbers are provided directly by such partners to end
            users, who contract with the end users for such numbers. Moreover, although our commercial agreements with our numbering partners usually include
            provisions requiring the transfer of numbers to a third party appointed by Skype upon termination of our agreement, such transfers may be legally,
            commercially, technically or practically difficult or impossible to carry out. As a result of these dependencies, the success of our SkypeIn and Skype To
            Go businesses is highly dependent on the ongoing conduct, business practices and financial health of our numbering partners, and the partner relationships
            we have with them. For example, if our local number partner terminated the agreement with Skype, encountered financial difficulty or became subject to
            bankruptcy or other insolvency proceedings, we might have to terminate or suspend the usage of existing SkypeIn and Skype To Go products and/or change
            the numbers in use by SkypeIn and Skype To Go end users in the affected country, disrupting the usage of the product by our end users.

                   Moreover, if local numbering rules or regulations or the interpretation or enforcement of such rules or regulations by local authorities or our partners
            change, we or our partners might have to terminate the provision of the affected products or implement relevant compliance measures, which could be
            difficult and costly, complicate the subscription process or restrict the usage of numbers to certain user categories or usage types. In addition, our partners
            may change their business practices in response to local or international factors (e.g., governmental regulation, competition, change in management or
            otherwise), and depending on the nature of such changes, they may impact our partners’ ability or willingness to provide SkypeIn or Skype To Go numbers
            or to provide them in the manner that we would prefer, or result in increased costs or new compliance requirements impacting our products.

                  Any of these changes and events could have an adverse impact on our SkypeIn and Skype To Go products, our business, results of operations, brand,
            reputation and regulatory status in the country in question and beyond.

            Use or delivery of our products may become subject to new or increased regulatory requirements, taxes or fees.
                  The increasing growth and popularity of Internet communications heighten the risk that governments will seek to regulate or impose new or increased
            fees or taxes on Internet communications products. To the extent that the use of our products grows, regulators may be more likely to seek to regulate or
            impose taxes on the distribution of our products. Similarly, advances in technology that are within or outside our control, such as improvements in locating
            the geographic origin of Internet communications, could cause our products to become subject to additional regulations, fees or taxes or could require us to
            invest in or develop new technologies, which

                                                                                           49




57 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            may be costly. In addition, as we continue to expand our user base and offer more products, we may become subject to new regulations, fees or taxes. For
            example, provision of our Skype for Business suite of products in the United States may result in greater regulatory oversight and increased exposure to
            income, sales and utility taxes and telecommunications fees in the United States. Increased fees could include access and other charges payable to local
            telephone companies that allow calls from Skype users to be made to traditional landline and mobile phones, contributions to federal or state universal
            service funds in the United States and similar funds elsewhere, and other charges. Increased regulatory requirements, taxes or fees on Internet
            communications products, which could be assessed by governments retroactively or prospectively, would substantially increase our costs, and, as a result,
            our business would suffer.

            We may become subject to additional income tax expense, which would adversely affect our results of operations and the value of our ADSs.
                   Skype’s favorable geographic mix of income contributes to lowering our overall tax expense. In particular, while our income is generated
            predominantly by our Luxembourg operating company, our tax expense is significantly lower than the amount computed by applying the Luxembourg
            statutory tax rate to pre-tax U.S. GAAP income because our taxable income is reduced as a consequence of, among other items, our intercompany licenses
            of intellectual property and historic net operating losses in Luxembourg. However, the determination of taxable income in any jurisdiction is dependent
            upon, among other factors, the acceptance of our operational and intercompany transfer pricing practices by taxing authorities as being on an arm’s length
            basis. Because the arm’s length standard is inconsistently applied among tax authorities and because double tax treaty relief may not be available,
            successful transfer pricing challenges could materially increase our reported income tax expense. Furthermore, it is possible that one or more jurisdictions
            will change its tax laws or its interpretation of existing tax laws (possibly on a retroactive basis) in a manner that would subject us to additional tax. If any
            of these things were to happen, our results of operations and growth prospects, and the value of our ADSs, could be materially adversely affected.

            We or certain of our subsidiaries may become subject to net income taxation in additional jurisdictions which would adversely affect our financial
            condition and the value of our ADSs.
                  We or one or more of our subsidiaries (including Skype Communications, through which we market and sell our products) may become treated as
            resident or as otherwise being engaged in a trade or business or having a permanent establishment in one or more jurisdictions in which we currently
            believe we or the relevant subsidiary is not so treated. If that were to happen, we or the relevant subsidiary would be subject to net income taxation in that
            jurisdiction on some or all of our or the relevant subsidiary’s income (depending on the jurisdiction and the circumstances). There could be many possible
            causes for such treatment, including activities indicating that management and control of our company or of the relevant subsidiaries are exercised in that
            jurisdiction, the nature of our activities and operations in that jurisdiction, or the location of our assets or use of our products in that jurisdiction. No
            assurance can be given that we will not be subject to such taxes retroactively or prospectively or that such taxes will not be substantial. The imposition of
            such taxes could have a material adverse effect on our results of operations and accordingly on the value of our ADSs.

            We may be subject to indirect taxes (such as value-added tax or sales tax) in jurisdictions in which we currently do not collect or pay such tax.
                  In the European Union, under the 6th value-added tax, or VAT, directive, the place of supply for most of our electronically delivered products is
            Luxembourg, and therefore a 15% VAT rate applies, which is among the lowest in the European Union. This rule will be in effect until December 31,
            2014, when the place of supply will shift to the place where the customer resides. This change may increase the ultimate cost of our products to E.U.
            resident customers and could decrease demand for our products. Moreover, such change will require to us to invest significant amounts in developing and
            modifying our technological and administrative systems to enable us to collect and remit VAT in multiple E.U. jurisdictions.

                                                                                           50




58 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                   In countries outside of the European Union, we generally do not collect or remit VAT. Some countries outside of the European Union may, however,
            require us to collect and remit VAT, which could be burdensome or expensive for us to administer and increase the costs of our products or reduce our
            profitability or result in losses. For example, tax authorities in Switzerland have notified us that we should collect and remit VAT from our users with a
            Swiss billing address. At present, we remit VAT to Switzerland, but we do not collect the VAT from our Swiss users and, as a result, we absorb the cost
            of VAT, which adversely affects our results of operations.

                  In the United States, the subsidiary through which we market and sell most of our products, Skype Communications, does not at present collect or
            remit U.S. state or municipal taxes (such as sales, excise, utility, use or ad valorem taxes), fees or surcharges in respect of sales to our U.S. customers.
            However, we have occasionally received inquiries from a small number of state and municipal taxing authorities seeking payment of taxes, fees or
            surcharges that are traditionally applied to, or collected from, customers of providers of traditional public switched telephone network services. In
            addition, U.S. federal regulators have inquired into whether Skype properly remits payments to the federal universal service fund.

                  With respect to a U.S. state’s ability to impose obligations to collect taxes, fees or surcharges with respect to sales made over the Internet, the U.S.
            Supreme Court’s decision in Quill Corporation v. North Dakota currently requires that a taxpayer have physical presence within the state before the state
            can collect such taxes. However, the U.S. Supreme Court has provided little guidance as to what levels of contacts constitute a physical presence, and no
            assurance can be given that we will not be found to have a physical presence in certain U.S. states based on, for example, our affiliations with other
            businesses that have a physical presence in the state.

                   Furthermore, a number of states, as well as the U.S. Congress, have been considering or have adopted initiatives that could limit the Supreme Court’s
            position regarding sales and use taxes on Internet sales. If these initiatives are successful, we could be required to collect sales and use taxes in a number
            of states or change our business practices. The imposition by state and local governments of various taxes, fees and surcharges upon Internet commerce
            could result in administrative burden, put us at a competitive disadvantage if similar obligations are not imposed on all or substantially all of our online
            competitors and affect negatively our future sales.

                   In addition, several proposals have been made at the U.S. federal, state and local levels that would impose additional taxes on communications
            through the Internet. These proposals, if adopted, could substantially impair our growth and substantially increase the costs of our products. In particular,
            the tax status of our products could subject us to conflicting taxation requirements and complexity with regard to the collection and remittance of VAT,
            sales or use taxes. Furthermore, given the international nature of our business, we may incur significant costs in developing and modifying our
            technological and administrative systems to enable us to collect and remit taxes in such a manner that applies only to the relevant taxable activity.

                  Any of these developments could adversely affect our results of operations and the value of our ADSs.

            Governments may levy new taxes on us which could adversely affect our financial condition and the value of our shares.
                  The current economic downturn has created or exacerbated budget deficits for many governments. Governments may seek to address these budget
            issues in part by imposing new taxes on businesses, including ours. Any such additional taxes could harm our results of operations.

            We may be unable to use some or all of our net operating loss carryforwards, which could adversely affect our reported financial condition and
            results of operations and therefore the value of our ADSs.
                  As of December 31, 2009, we had net operating loss carryforwards of $2.0 billion, which primarily consisted of $1.8 billion net operating loss
            carryforwards recognized in Luxembourg and $0.2 billion net

                                                                                           51




59 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            operating losses recognized in Ireland (which we currently do not expect to utilize as our Irish subsidiary does not generate taxable income). Our ability to
            utilize net operating loss carryforwards may be limited for a number of reasons, including insufficient future taxable income at the relevant entity. For this
            reason, we periodically establish valuation allowances in respect of our net operating loss carryforwards. However, the recognition of valuation
            allowances requires significant judgment, and the valuation allowances we have recognized may be insufficient in the event we are able to use less net
            operating losses than previously estimated.

            We may incur additional tax assessments.
                  We are subject to income taxes in Luxembourg, the United States and various other jurisdictions. The determination of our worldwide provision for
            income taxes and other tax liabilities requires estimation and significant judgment and there are many transactions and calculations where the ultimate tax
            determination is uncertain. Furthermore, our determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax
            authorities, and we currently have “open” tax years that could become subject to audits, investigations and reviews by taxing authorities throughout the
            world. Any adverse outcome of any such audit or review could have a negative effect on our business, operating results and financial condition, and the
            ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially adversely affect our reported financial results in
            the period or periods for which such determination is made.

            Problems with or price increases by third parties who provide services to us or to our users could harm our business.
                  We rely on telecommunications providers to provide certain of our products. A number of parties, many of whom compete with us, provide
            services to us or to our users that we rely on to offer our products. We have agreements with a number of telecommunications providers in order for us to
            provide many of our paid products, including our SkypeOut and SkypeIn products. The quality of calls made by our users to and received by our users from
            landline and mobile phones depends in large part of the call quality of the relevant landline or mobile network. As a result, if these third parties do not
            provide sufficiently high quality services, our call quality may be negatively affected which may in turn adversely impact our brand, reputation and
            consumer acceptance of our products. In addition, price increases by companies that provide services to us or our users could harm our results of
            operations.

                   We outsource certain functions to third parties and if they do not perform satisfactorily, our business may be harmed. We have outsourced
            elements of certain functions to third-party providers, including payment processing and the support of certain mobile operations. If these third-party
            service providers do not perform satisfactorily or cease operations or are otherwise unable to provide these services, our operations could be disrupted,
            which could adversely affect our business and results of operations. In that regard, we rely on third parties to provide all of the credit card payment
            processing for our paid products with Bibit BV, an affiliate of Royal Bank of Scotland, and PayPal, an eBay subsidiary, handling an aggregate of
            approximately 80% of the processing of our net revenues. If our third party payment processor ceased to provide these services to us, we would need to
            transition to an alternate provider which would require us to integrate our IT systems with the IT systems of the replacement provider. In addition, we
            would need to negotiate a new contract within a very short timeframe which could result in terms that are less favorable to us.

                   We have recently started to license our application programming interfaces and software to third parties, and actions these third parties take
            may harm us. In July 2010, we released SkypeKit, a software development kit that allows independent software developers and consumer electronics
            manufacturers to incorporate Skype capabilities with their own applications and devices. Such third party developers and manufacturers may make
            available software, hardware, services, features, systems and solutions that operate with our Internet communications products in breach of our licensing
            agreements and/or applicable laws or regulations. Such third party products may further be used to offer our products to users in ways that may adversely
            affect our regulatory positioning, product security, user experience and brand image, and breach laws such as consumer protection, user privacy and data
            protection laws and intellectual property or other third party rights.

                                                                                          52




60 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Our business may be adversely affected by factors that cause our users to spend less time using our products, including seasonal factors, worker
            migration patterns, national events and increased usage of other websites.
                   Anything that diverts our users from their customary level of usage of our products could adversely affect our business. Our results of operations
            historically have been seasonal because many of our users reduce their use of our products with the onset of good weather during the summer months and
            our users tend to use our products more in the fourth quarter during the holiday season. Our rapid growth may have overshadowed whatever seasonal
            factors might have influenced our business to date. In addition, if worker migration patterns change, our business may be affected. For example, if fewer
            workers seek work outside their home country due to the current economic recession or otherwise, the volume of international calling may decline. In
            addition, increased usage of social networking websites may decrease the amount of time users spend using our communications products, which could
            adversely affect our financial results.

            Our plans to expand our products may not be successful.
                 Part of our strategy is to expand our products for business customers, expand our mobile products, and attract third-party developers and other
            companies to extend the functionality of our products. If these initiatives are not successful, our business may suffer.

                   Our strategy contemplates expanded products for the business market, which is a more difficult market for us to penetrate. Business customers
            have different needs and often have more demanding expectations than consumers, and we will likely need to add product features and provide more
            consistent quality, among other things, in order to attract business customers. For example, we have historically not offered robust customer service.
            Although we have recently enhanced our capabilities in this area, these enhancements may not be sufficient to meet business customer expectations.
            Initiatives to attract business customers may be costly, and we may not be able to recover the costs incurred. In addition, many business vendors offer
            unified communication systems that include products we do not offer, such as email. These vendors also are recognized brands in the business marketplace
            and have incumbent status, including, in certain cases, long-term customer contracts, and as a result, it may be difficult for us to replace them. In addition,
            in-house information technology staff may be more familiar with the products of enterprise vendors, which also may make it more difficult to displace
            them. If we are unable to successfully develop and market products to business customers, our results of operations may suffer.

                  Our strategy depends on our ability to continue to offer our products on a mobile platform, and mobile network operators may be reluctant to
            partner with us. Our business strategy depends on our ability to continue to offer our products on a mobile platform. Mobile network operators may be
            reluctant to partner with us or allow our products to be used on their devices due to concerns about cannibalizing their business. We have already faced
            such reluctance by mobile network operators, particularly in European markets, in relation to VoIP and peer-to-peer applications generally.

                  Similarly, mobile hardware manufacturers and applications store providers may be reluctant to sell Skype mobile products in their application stores
            due to a concern of jeopardizing established relationships with their major hardware customers and mobile network operators. Application store owners
            have ultimate control over the products and services made available through their channels and may choose to remove Skype from their stores or restrict
            functionality based on perceived competitive threat or cannibalization of their own products. For example, although our application for the Apple iPad,
            iPhone and iTouch is currently enabled to make voice communications over 3G networks, Apple or its carrier partners may choose to alter the terms of
            inclusion in its application store, effectively withdrawing this functionality at any time or develop competing applications, such as Apple Face Time, that
            may better integrate with Apple’s devices.

                 Third party developers and other companies may not develop applications to extend our platform. Our strategy contemplates attracting third party
            developers and other companies to use our application programming interfaces to extend our platform; however, this is a recent initiative for us and we
            may not be able to attract developers and other companies interested in developing applications for our platform.

                                                                                          53




61 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time
            to complying with public company regulations.
                  Skype was acquired by eBay on October 14, 2005 and operated as an indirect, wholly-owned subsidiary of eBay until the effective date of the Skype
            Acquisition on November 19, 2009. We have operated as a privately held company since the effective date of the Skype Acquisition. After this offering,
            we will become obligated to file with the Securities and Exchange Commission (the “SEC”) annual and other reports pursuant to the Securities Exchange
            Act of 1934, as amended (the “Exchange Act”). We will also be required to ensure that we have the ability to prepare financial statements that are fully
            compliant with all applicable reporting requirements on a timely basis. In addition, we will also become subject to other reporting and corporate
            governance requirements, including certain requirements of the Nasdaq Stock Market, and certain provisions of the Sarbanes-Oxley Act of 2002
            (“Sarbanes-Oxley”) and the regulations promulgated under Sarbanes-Oxley, which will impose significant compliance obligations upon us.

                  Sarbanes-Oxley, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Market, have imposed increased regulation and
            disclosure and required enhanced corporate governance practices of public companies. Our efforts to comply with evolving laws, regulations and
            standards in this regard are likely to result in increased expenses and a diversion of management’s time and attention from revenue-generating activities to
            compliance activities. These changes will require a significant commitment of additional resources. We may not be successful in implementing these
            requirements and implementing them could materially adversely affect our business, results of operations and financial condition. In addition, if we fail to
            implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate
            basis could be impaired. If we do not implement such requirements in a timely manner or with adequate compliance, we might be subject to sanctions or
            investigation by regulatory authorities, such as the SEC or the Nasdaq Stock Market. Any such action could harm our reputation and the confidence of
            investors and users in our company and could materially adversely affect our business and cause the market price of our ADSs to fall.

                  In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public
            companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are
            subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new
            guidance is provided by regulatory and governing bodies. If our efforts to comply with new laws, regulations and standards differ from the activities
            intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our
            business may be harmed.

                   We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer
            liability insurance, and we may be required to incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to
            attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified
            executive officers.

            Failure to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley could have a material adverse effect
            on our business and stock price.
                   As a public company, we will be required to document and test our internal control over financial reporting in order to satisfy the requirements of
            Section 404 of Sarbanes-Oxley, which will require annual management assessments of the effectiveness of our internal control over financial reporting
            and, beginning with our annual report on Form 10-K for the year ended December 31, 2011, a report by our independent registered public accounting firm
            that addresses the effectiveness of internal control over financial reporting. During the course of our testing, we may identify deficiencies which we may
            not be able to remediate in time to meet our deadline for compliance with Section 404 or that may require a restatement or other revision to our financial
            statements. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our
            business. We also expect that the imposition of these regulations will increase

                                                                                           54




62 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            our legal and financial compliance costs, make it more difficult to attract and retain qualified officers and members of our board of directors, particularly
            to serve on our audit committee, and make some activities more difficult, time consuming and costly. We may not be able to conclude on an ongoing basis
            that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may
            not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal
            control over financial reporting is not effective, we cannot be certain that our financial statements are accurate. If either we are unable to conclude that we
            have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified
            report as required by Section 404, then investors could lose confidence in our reported financial information, which would likely have a negative effect on
            the trading price of our ADSs. In addition, if we do not maintain effective internal controls, we may not be able to accurately report our financial
            information on a timely basis, which could harm the trading price of our ADSs, impair our ability to raise additional capital, or jeopardize our continued
            listing on Nasdaq Stock Market or any other stock exchange on which our ADSs may be listed.

            Our substantial indebtedness could adversely affect our financial health and our ability to raise additional capital to fund our operations, limit our
            ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate indebtedness and prevent
            us from fulfilling our obligations under our indebtedness.
                 As of June 30, 2010, we had $727.9 million of debt outstanding under our Amended Five Year Credit Agreement. See “Management’s Discussion
            and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Management—Indebtedness.” Subject to restrictions in our
            Amended Five Year Credit Agreement, we may incur additional indebtedness.

                  Our substantial indebtedness could have important consequences, including:
                    •   increasing our vulnerability to adverse general economic and industry conditions;
                    •   requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the
                        availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business
                        strategy and other general corporate purposes;
                    •   limiting our flexibility in planning for, or reacting to, changes in the economy and technologies;
                    •   placing us at a competitive disadvantage compared to our competitors with less indebtedness;
                    •   exposing us to interest rate and foreign currency risks;
                    •   limiting our ability to, or increasing the costs to, refinance indebtedness; and
                    •   making it more difficult to borrow additional funds in the future to fund working capital, capital expenditures and other purposes.

                  Any of the foregoing could materially and adversely affect our business, financial conditions and results of operations.

            Our credit agreement imposes significant restrictions on our business and the lenders are entitled to take possession of and sell the assets we have
            pledged as collateral if there is a default under the credit agreement.
                   Our Amended Five Year Credit Agreement contains a number of covenants imposing significant restrictions on our business. These restrictions may
            affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions
            placed on us include limitations, among other things, on our ability and the ability of our subsidiaries to:
                    •   incur additional indebtedness and incur or create liens;
                    •   consolidate, merge, liquidate or dissolve;

                                                                                           55




63 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                    •   make investments, acquisitions, loans or advances;
                    •   transfer and sell assets;
                    •   engage in sale and lease back transactions;
                    •   enter into swap, forward, future or derivative transactions;
                    •   pay dividends or make other distributions on, redeem or repurchase equity interests, including our ADSs or ordinary shares, or make payments
                        on junior financing; and
                    •   engage in transactions with affiliates.

                  Our Amended Five Year Credit Agreement also requires us to meet an interest expense coverage ratio test and a leverage ratio test. Our ability to
            meet these ratios may be affected by events beyond our control, and we cannot assure you that we will be able to maintain these ratios at all relevant times.

                   In addition, under our Amended Five Year Credit Agreement, we may be required to prepay outstanding term loans in a number of circumstances,
            including if we receive net proceeds arising from the sale or transfer of assets and properties (such sale and transfer would not, however, include this
            offering) or the incurrence of additional indebtedness. In addition, after the end of each fiscal year, commencing with the fiscal year ending December 31,
            2010, we will be required to prepay outstanding term loans with a percentage of our “excess cash flow,” calculated as set forth in our Amended Five Year
            Credit Agreement, if our leverage ratio exceeds pre-defined levels. If, as of the end of the fiscal year, our leverage ratio is greater than or equal to 3:1, we
            will be required to prepay outstanding term loans in the aggregate amount of 50% of our excess cash flow. If, as of the end of the fiscal year, our leverage
            ratio is greater than or equal to 2.25:1 but less than 3:1, we will be required to prepay outstanding term loans in the aggregate amount of 25% of our excess
            cash flow. If our leverage ratio is less than 2.25:1 as of the end of the fiscal year, we will not be required to prepay outstanding term loans with excess
            cash flow for that year.

                   The foregoing restrictions could limit our ability to plan for, or react to, changes in market conditions or our capital needs. If for any reason we are
            unable to meet these requirements, we may not be granted waivers under, or amendments to, our Amended Five Year Credit Agreement or we may not be
            able to refinance our indebtedness on terms acceptable to us, or at all. The breach of any of these restrictions, covenants or prepayment requirements could
            result in a default under our Amended Five Year Credit Agreement, which would have a material adverse effect on our business, financial condition and
            results of operations. Our obligations under the Amended Five Year Credit Agreement are secured by pledges of all share capital held by Skype Global
            and certain of our subsidiaries, and by security interests in substantially all of our tangible and intangible assets (with certain exceptions, including deposit
            accounts, other bank or securities accounts and other assets already subject to security interests). On occurrence of an event of default, the loans may be
            accelerated and declared due and payable immediately and the lenders would be entitled to take possession of and sell the assets we have pledged as
            collateral and to apply the proceeds from those sales to repay loans and other amounts due under the Amended Five Year Credit Agreement. For more
            information on our outstanding indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
            and Capital Management—Indebtedness” elsewhere in this prospectus.

            A significant part of our historical financial results is unlikely to be representative of our results as a stand-alone company.
                   Skype was acquired by eBay on October 14, 2005 and operated as part of the eBay group until the effective date of the Skype Acquisition on
            November 19, 2009. Our financial results from October 14, 2005 to November 18, 2009 have been prepared from the accounting records of eBay using the
            historical basis of assets and liabilities of Skype Companies. As part of the eBay group, Skype received various services and support provided by eBay,
            including finance, legal, information technology systems, shared facilities and human resources. Although we have entered into agreements with eBay
            pursuant to which eBay has provided and will provide us

                                                                                           56




64 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            with similar services and support up to November 2010 (subject to any extension), administrative, general corporate and other expenses of our business
            have increased and may further increase substantially.

                  Our financial statements for the periods subsequent to October 14, 2005 and prior to November 19, 2009 include estimated allocations of certain
            eBay expenses including centralized legal, tax, treasury, information technology, employee costs, corporate services and other infrastructure costs,
            collectively referred to as “corporate allocations.” Although the corporate allocations have been determined on a basis that we considered to be
            reasonable reflections of the utilization of services provided or the benefit received by us, our actual expenses might have been higher, perhaps
            substantially, than those allocations had we operated as a stand-alone company for the periods presented. Accordingly, our financial statements for the
            periods subsequent to October 14, 2005 and prior to November 19, 2009 do not purport to reflect what our results of operations or financial position
            would have been had we operated as a stand-alone company during the periods presented nor do they purport to indicate what our results of operations or
            financial position will be as of any future date or for any future period.

                  In particular, we are a smaller and less diversified company than eBay, and we do not have access to financial and other resources comparable to
            those of eBay. As a separate, stand-alone company, we may be unable to obtain goods, technology and services at prices and on terms as favorable as
            those available prior to the Skype Acquisition.

            We have entered into a tax cooperation agreement with eBay pursuant to which we may be required to pay eBay an indemnity if we engage in
            certain changes to our operations without eBay’s consent.
                  In connection with the Skype Acquisition, we entered into a tax cooperation agreement with eBay pursuant to which we have agreed to notify and
            collaborate with eBay if we propose material changes to our operations, including new business initiatives, changes to existing business models, mergers,
            acquisitions, disposition of stock or assets or material changes in the source or character of income. If in eBay’s reasonable judgment, such material
            changes may result in an increase in certain types of so-called Subpart F Income that eBay may be required to recognize in accordance with the U.S.
            Internal Revenue Code of 1986, as amended, and if we implement such material change without eBay’s consent, we would need to pay eBay an indemnity
            equal to its tax liability arising from its pro rata share of such increase in these types of Subpart F Income for each taxable year in which eBay holds
            (directly, indirectly or constructively) 10% or more of our voting power and in which U.S. persons holding (directly, indirectly or constructively) 10% or
            more of our voting power hold (directly, indirectly or constructively) in the aggregate more than 50% of our shares by vote or value. Such indemnity may
            negatively affect our results of operation and we may forego certain restructurings or new business opportunities or might choose to structure new business
            opportunities in a more expensive way in order to avoid paying such indemnity.

            Risks Related to Investment in a Luxembourg Company

            We will become a Luxembourg joint stock company (“société anonyme”) upon our corporate reorganization and it may be difficult for you to
            obtain or enforce judgments against us or our executive officers and directors in the United States.
                   We are organized under the laws of the Grand Duchy of Luxembourg. Most of our assets are located outside the United States. Furthermore, some of
            our directors and officers named in this prospectus reside outside the United States and most of their assets are located outside the United States. As a
            result, investors may find it difficult to effect service of process within the United States upon us or these persons or to enforce outside the United States
            judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S.
            federal securities laws. Likewise, it may also be difficult for an investor to enforce in U.S. courts judgments obtained against us or these persons in courts
            located in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S.

                                                                                          57




65 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            federal securities laws. It may also be difficult for an investor to bring an original action in a Luxembourg court predicated upon the civil liability
            provisions of the U.S. federal securities laws against us or these persons. Luxembourg law, furthermore, does not recognize a shareholder’s right to bring a
            derivative action on behalf of the company.

                  As there is no treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters between the United States
            and the Grand Duchy of Luxembourg, courts in Luxembourg will not automatically recognize and enforce a final judgment rendered by a U.S. court. The
            enforceability in Luxembourg courts of judgments entered by U.S. courts will be subject to the conditions set forth in the Luxembourg procedural code
            which may include the following conditions:
                   •    the judgment of the U.S. court is enforceable (exécutoire) in the United States;
                   •    the U.S. court had jurisdiction over the subject matter leading to the judgment (that is, its jurisdiction was in compliance both with Luxembourg
                        private international law rules and with the applicable domestic U.S. federal or state jurisdictional rules);
                   •    the U.S. court has applied to the dispute the substantive law which would have been applied by Luxembourg courts;
                   •    the judgment was granted following proceedings where the counterparty had the opportunity to appear, and if it appeared, to present a defense;
                   •    the U.S. court has acted in accordance with its own procedural laws; and
                   •    the judgment of the U.S. court does not contravene Luxembourg international public policy.

                  Under our articles of incorporation, we indemnify and hold our directors harmless against all claims and suits brought against them, subject to
            limited exceptions. Under our articles of incorporation, to the extent allowed by law, the rights and obligations among or between us, any of our current or
            former directors and officers shall be governed exclusively by the laws of Luxembourg and subject to the jurisdiction of the Luxembourg courts, unless
            such rights or obligations do not relate to or arise out of their capacities listed above. Although there is doubt as to whether U.S. courts would enforce such
            provision in an action brought in the United States under U.S. securities laws, such provision could make enforcing judgments obtained outside
            Luxembourg more difficult to enforce against our assets in Luxembourg or jurisdictions that would apply Luxembourg law.

            Our shareholders may have more difficulty protecting their interests than they would as shareholders of a U.S. corporation.
                  Our corporate affairs are governed by our articles of incorporation and by the laws governing joint stock companies organized under the laws of the
            Grand Duchy of Luxembourg. The rights of our shareholders and the responsibilities of our directors and officers under Luxembourg law are different from
            those applicable to a corporation incorporated in the United States. There may be less publicly available information about us than is regularly published
            by or about U.S. issuers. Also, Luxembourg regulations governing the securities of Luxembourg companies may not be as extensive as those in effect in the
            United States, and Luxembourg law and regulations in respect of corporate governance matters might not be as protective of minority shareholders as state
            corporation laws in the United States. Therefore, our shareholders may have more difficulty in protecting their interests in connection with actions taken by
            our directors and officers or our principal shareholders than they would as shareholders of a corporation incorporated in the United States. Please see
            “Description of Share Capital” for a discussion of differences between Luxembourg and Delaware corporate law.

            Luxembourg law authorizes our shareholders to nominate corporate directors.
                  Under Luxembourg law, our shareholders may nominate a corporation or other legal entity as a member of our board of directors, to which we refer
            as a “corporate director.” While a corporate director assumes all responsibility

                                                                                          58




66 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            of an individual director, the corporate director may benefit from limited liability as a corporate director or other limited liability entity, as the case may
            be and our shareholders may not be able to successfully pursue any rights they may have against the individuals representing a corporate director in the
            decisions taken by our board of directors or the members, shareholders or other equity owners of such corporate director. Currently, our Board of
            Directors includes two corporate directors, Joltid Limited and M.F.A. Mulder Beheer B.V.

            You may not be able to participate in equity offerings, and you may not receive any value for rights that we may grant.
                   Pursuant to Luxembourg corporate law, existing shareholders are generally entitled to preemptive subscription rights in the event of capital increases
            and issues of shares against cash contributions. However, under our articles of incorporation, our board of directors has been authorized to waive, limit or
            suppress such pre-emptive subscription rights until          and the general meeting of our shareholders may renew, expand or amend such authorization. In
            addition, under the deposit agreement for the ADSs and applicable law, the depositary will not offer these rights to ADS holders unless both the rights and
            the underlying securities to be distributed to ADS holders are either registered or exempt from registration under the Securities Act of 1933, as amended
            (the “Securities Act”), with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or
            underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any
            exemptions from registration under the Securities Act. Accordingly, holders of our ADSs and ordinary shares may be unable to participate in our rights
            offerings and issue of shares and may experience dilution of their holdings as a result. If the depositary is unable to sell preemptive subscription rights
            corresponding to ordinary shares represented by ADSs that are not exercised by, or distributed to, ADS holders, or if the sale of these rights is not lawful
            or reasonably practicable, the depositary will allow the rights to lapse, in which case ADS holders will receive no value for these rights.

            Risks Related to Our ADSs and this Offering
            Control by principal shareholders could adversely affect our other shareholders.
                   When this offering is completed, our executive officers, directors and greater than 5% shareholders, collectively, will beneficially own
            approximately           % of ordinary shares (including ordinary shares represented by ADSs) (based on the number of ordinary shares outstanding as of
                             2010 and excluding ordinary shares issuable upon exercise of outstanding options), assuming no exercise of the underwriters’ option to
            purchase additional ADSs. In addition, we expect that, pursuant to the terms of the Shareholders Agreement that we expect to be amended prior to this
            offering, certain Silver Lake funds, eBay International AG, CPP Investment Board Private Holdings Inc. and Joltid Limited will be able to elect their
            respective designees to serve as members of our board of directors. These shareholders will have a continuing ability to control our board of directors and
            will continue to have significant influence over our affairs for the foreseeable future, including controlling the election of directors and significant
            corporate transactions, such as a merger or other sale of our company or our assets.

                  In addition, under the “controlled company” exception to the independence requirements of the Nasdaq Stock Market, we will be exempt from the
            rules of the Nasdaq Stock Market that require that our board of directors be comprised of a majority of independent directors, that we have a compensation
            committee comprised solely of independent directors and that we have a nominating and governance committee comprised solely of independent directors.
            This concentrated control will limit the ability of other shareholders to influence corporate matters and, as a result, we may take actions that our other
            shareholders do not view as beneficial. For example, this concentration of ownership could have the effect of delaying or preventing a change in control or
            otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could cause the market price of our ADSs to decline or
            prevent our shareholders from realizing a premium over the market price for their ADSs.

                                                                                           59




67 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            The market price of our ADSs may be volatile and may decline.
                  Prior to this offering, our ordinary shares or ADSs have not been traded in the public markets. We cannot predict the extent to which a trading market
            for our ADSs will develop or how liquid that market might become. An active trading market for our ADSs may never develop or may not be sustained,
            which could adversely affect your ability to sell your ADSs and the market price of your ADSs. The initial public offering price for the ADSs was
            determined by negotiations between us, the selling stockholder and the underwriters and does not purport to be indicative of prices at which our ADSs will
            trade upon completion of this offering.

                  The stock market in general, and the market for equities of some technology companies, early stage companies and Internet companies in particular,
            has been highly volatile. As a result, the market price of our ADSs is likely to be similarly volatile, and investors in our ADSs may experience a decrease,
            which could be substantial, in the value of their ADSs, including decreases unrelated to our operating performance or prospects, or a complete loss of their
            investment. The price of our ADSs could be subject to wide fluctuations in response to a number of factors, including those listed elsewhere in this “Risk
            Factors” section and others such as:
                    •   variations in our operating performance and the performance of our competitors;
                    •   actual or anticipated fluctuations in our quarterly or annual operating results;
                    •   changes in our revenues or earnings estimates or recommendations by securities analysts;
                    •   publication of research reports by securities analysts about us or our competitors or our industry;
                    •   our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;
                    •   additions or departures of key personnel;
                    •   strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in
                        business strategy;
                    •   announcement of technological innovations by us or our competitors;
                    •   the passage of legislation, change in interpretations of laws or other regulatory events or developments affecting us;
                    •   speculation in the press or investment community;
                    •   changes in accounting principles;
                    •   the expiration of contractual lock-up arrangements with our executive officers, directors and shareholders;
                    •   terrorist acts, acts of war or periods of widespread civil unrest; and
                    •   changes in general market and economic conditions.

                    In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type
            of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to
            satisfy judgments or to settle or defend litigation.

                  A total of       or      % of our total outstanding ordinary shares (including ordinary shares represented by ADSs) after the offering are restricted
            from immediate resale, but may be sold on a stock exchange in the near future. The large number of ordinary shares or ADSs eligible for public sale or
            subject to rights requiring us to register them for public sale could depress the market price of our ADSs.

                   The market price of our ADSs could decline as a result of sales of a large number of shares of our ordinary shares or ADSs in the market after this
            offering, and the perception that these sales could occur may also depress

                                                                                           60




68 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            the market price of our ADSs. We will have         ordinary shares outstanding (including ordinary shares represented by ADSs) after this offering, assuming
            no exercise of our outstanding options or warrants. Of these shares,      ordinary shares represented by ADSs sold in this offering will be freely tradable
            in the United States, except for any ordinary shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933.

                   The holders of       shares of outstanding ordinary shares or ADSs have agreed with the underwriters, subject to a number of exceptions, not to
            dispose of or hedge any of their ordinary shares during the 180-day period beginning on the date of this prospectus, except with the prior written consent of
            the representatives of the underwriters in this offering. After the expiration of the 180-day restricted period, these shares and ADS, may be sold in the
            public market in the United States, subject to prior registration in the United States, if required, or reliance upon an exemption from U.S. registration,
            including, in the case of ordinary shares or ADSs held by affiliates, compliance with the volume restrictions of Rule 144. We expect           ordinary shares
            to be subject to contractual transfer restrictions pursuant to the Shareholders Agreement, which we expect to be amended prior to this offering (see
            “Certain Relationships and Related Party Transactions—Amended and Restated Shareholders Agreement”).

            Number of Shares and %
            of Total Outstanding             Date Available for Sale into Public Markets
                         ,or   %             Immediately after this offering.
                         ,or   %             180 days after the date of this prospectus due to contractual obligations and lock-up agreements between the holders of
                                             these shares and the underwriters. However, the representatives of the underwriters can waive the provisions of these
                                             lock-up agreements and allow these shareholders to sell their shares or ADSs at any time, provided applicable holding
                                             period under Rule 144 have expired.

                   Upon completion of this offering, the holders of           ordinary shares, or % of our outstanding ordinary shares as of          June 30, 2010, will
            be entitled, under contracts providing for registration rights, to require us to register our ordinary shares or ADSs owned by them with the SEC. Upon
            effectiveness of any registration statement, subject to lock-up agreements with the representatives of the underwriters, those ordinary shares or ADSs will
            be available for immediate resale in the United States in the open market.

                   Sales of our ordinary shares and ADSs as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities
            in the future at a time and at a price that we deem appropriate. These sales, or the perception that such sales could occur also could cause the market price
            for our ADSs to fall and make it more difficult for you to sell our ADSs.

            Purchasers in this offering will immediately experience substantial dilution in net tangible book value of their ADSs.
                   The initial public offering price of our ADSs in this offering is considerably more than the net tangible book value per ADS. Purchasers in this
            offering will suffer immediate dilution of $        per ADS pro forma net tangible book value, based on the sale of ADSs to be sold in this offering at an
            assumed initial public offering price of $        per ADS (the mid-point of the price range set forth on the cover of this preliminary prospectus). See
            “Dilution.”

            After the completion of this offering, we do not expect to declare any dividends in the foreseeable future.
                  After the completion of this offering, we do not anticipate making any cash or other distributions on our ordinary shares in the foreseeable future. The
            payment of cash distributions on ordinary shares is restricted under the terms of our Amended Five Year Credit Agreement. In addition, because we are a
            holding company, our ability to make any distributions on ordinary shares may be limited by restrictions on our ability to obtain

                                                                                           61




69 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            sufficient funds from subsidiaries, including restrictions under the terms of our Amended Five Year Credit Agreement. Furthermore, under the laws of
            Luxembourg, we are able to make distributions only to the extent that we receive distributions from our subsidiaries, recognize gains from the sale of our
            assets or have available share premium. We anticipate that we will retain all of our available funds for use in the operation and development of our
            business. Accordingly, investors must rely on sales of their ADSs after price appreciation, which may never materialize, as the only way of realizing any
            future gains on their investments. Investors seeking cash or other distributions should not purchase our ADSs. See “Distribution Policy.”

            If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding
            our ADSs or if our operating results do not meet their expectations, the price of our ADSs could decline.
                  The market price of our ADSs will be influenced by the research and reports that industry or securities analysts publish about us or our business. If
            one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets,
            which in turn could cause the market price of our ADSs or its trading volume to decline. Moreover, if one or more of the analysts who cover our company
            downgrade our ADSs or if our operating results or prospects do not meet their expectations, the market price of our ADSs could decline.

            Future equity issuances may dilute the holdings of current ordinary shareholders or ADS holders and could materially affect the market price of
            our ADSs.
                  We may in the future decide to offer additional equity to raise capital or for other purposes. Any such additional offering could reduce the
            proportionate ownership and voting interests of holders of our ordinary shares and ADSs, as well as our earnings per ordinary share or ADS and net asset
            value per ordinary share or ADS.

            As a holder of our ADSs, you do not have the same rights as those of our ordinary shareholders, may not receive voting materials in time to be able
            to exercise your right to vote, may not receive distributions, if any, we make on our ordinary shares and will be required to pay certain fees and
            expenses.
                   Holders of ADSs do not have the same rights as those of our ordinary shareholders and may only exercise voting rights with respect to the underlying
            ordinary shares in accordance with the provisions of the deposit agreement. Under our articles of incorporation, which will become effective prior to the
            closing of this offering, the minimum notice period required to convene a general meeting is eight days. When a general meeting is convened, you may not
            receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any
            specific matter and both any such withdrawal and any subsequent deposit of those ordinary shares in exchange for ADSs will require that you pay fees to
            the depositary. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely
            manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you
            will receive the voting materials in time to ensure that you can instruct the depositary to vote the ordinary shares underlying your ADSs. Furthermore, the
            depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the
            effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if the ordinary shares underlying your
            ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

                   Holders of ADSs may not receive all of the distributions, if any, we make on our ordinary shares. For example, if we offer holders of our ordinary
            shares any rights to subscribe for additional ordinary shares or any other rights and if the depositary for the ADSs decides that it is not legal and practical
            to make those rights available to holders of ADSs and that is it is not practical to sell those rights and distribute the net proceeds to ADS holders, those
            rights will lapse and holders of ADSs will receive no value for them. Moreover, we generally

                                                                                           62




70 of 341                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            would be required to file a registration statement under the Securities Act in order for the depositary to make any rights available to ADS holders and we
            have no obligation to do so. Likewise, holders of ADSs may not receive the same property, if any, we distribute on our ordinary shares. For example, if we
            make a distribution of securities or property on our ordinary shares then, to the extent that the depositary deems the distribution of those securities or
            property to holders of ADSs not to be equitable and practical, it may sell those securities or property and distribute the net proceeds to holders of ADSs. In
            addition, holders of ADSs will be required to pay an annual fee for services performed by the depositary in administering our ADS program, a fee for any
            distributions made to ADS holders, a fee for exchanging ADSs for ordinary shares or ordinary shares for ADSs, and other specified fees and expenses. We
            may agree with the depositary to amend the depositary agreement without your consent for any reason.

                   As a result, holders of ADSs may not have the same voting and other rights as holders of our ordinary shares, may not receive the same distributions,
            if any, as holders of our ordinary shares and will be required to pay certain charges and expenses.

            You may be subject to limitations on transfer of your ADSs.
                  Your ADSs are transferable on the books of the depositary. However, the depositary may refuse to deliver, transfer or register transfers of ADSs
            generally when its books are closed or when any such action is deemed necessary or advisable by the depositary or by us or because of any requirement of
            law or of any governmental body or commission. Moreover, the surrender of ADSs and withdrawal of our ordinary shares may be suspended pending the
            payment of fees, taxes and similar charges or if we direct the depositary at any time to cease new issuances and withdrawals of our shares during periods
            specified by us in connection with shareholders’ meetings, the payment of dividends or as otherwise reasonably necessary for compliance with any
            applicable laws or government regulations.

            Our management will have considerable discretion as to the use of the net proceeds to be received by us from this offering.
                  Our allocation of the net proceeds to be received by us in this offering is based on current plans and business conditions. The amounts and timing of
            any expenditure will vary depending on the amount of cash generated by our operations and competitive and market developments, among other factors.
            Accordingly, our management will have considerable discretion in the application of the net proceeds received by us. The net proceeds may be used for
            corporate purposes that do not improve our profitability or increase the price of our ADSs. Net proceeds from this offering, pending allocation to operating
            assets, may be placed in investments that do not produce income or that lose value.

            If you directly or indirectly acquire more than 10% of our outstanding shares, including in the form of ADSs, CFC rules may apply to you.
                  We expect that we and certain of our non-U.S. subsidiaries will be controlled foreign corporations (“CFCs”) for United States federal income tax
            purposes immediately following the offering. Each “U.S. shareholder” of a CFC that directly or indirectly owns shares in the CFC on the last day of the
            CFC’s taxable year must generally include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC’s “Subpart F income,”
            even if the Subpart F income is not distributed. For these purposes, any U.S. person who owns, directly, indirectly through foreign persons, or
            constructively (under applicable constructive ownership rules of the U.S. Internal Revenue Code of 1986, as amended) 10% or more of the total combined
            voting power of all classes of shares of a foreign corporation will be considered to be a “United States shareholder” of the corporation. See “United States
            and Luxembourg Income Tax Considerations—United States Federal Income Tax Considerations—Controlled Foreign Corporation Rules.”

                                                                                         63




71 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                      FORWARD-LOOKING STATEMENTS

                   This prospectus includes forward-looking statements, including statements that involve expectations, plans or intentions (such as those relating to
            future business or financial results, new features or products, or management strategies). You can identify these forward-looking statements by words such
            as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. These
            forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in these
            forward-looking statements. These risks and uncertainties include, among others, those described under “Risk Factors” and elsewhere in this prospectus,
            including in our financial statements and related notes appearing in this prospectus, and the following:
                   •    our ability to maintain or improve our operating and financial performance, and fluctuations in our financial performance;
                   •    uncertainties and limitations of our user metrics;
                   •    intense competition from companies in a number of industries, including Internet product and software companies, telecommunication
                        companies and hardware-based VoIP providers and, potentially, small and medium-sized enterprise telecommunications services providers;
                   •    intellectual property litigation and our ability to protect our intellectual property, technology and brand;
                   •    regulation of our current or future products and services and the risk that compliance with regulatory requirements may be costly and may
                        require that we change the products we offer or the way we do business in particular states, countries or other regions, or that we may be
                        unable to comply with regulatory requirements;
                   •    challenges managing a global business and our reliance on local partners and third-party vendors;
                   •    the growth and availability of broadband Internet access and the risk that some countries may block use of our products;
                   •    our dependence on key personnel and our management team’s limited experience working as a group;
                   •    the impact of new technologies on demand for our products;
                   •    product errors, system failures and the reliability of Internet infrastructure;
                   •    fraudulent activities, use of our products for illegal purposes, and real or perceived security or privacy risks;
                   •    risks associated with acquisitions, minority investments and other strategic transactions;
                   •    increased taxation of our products or increased income tax expense, and our ability to use our net operating losses;
                   •    our ability to expand our products;
                   •    the costs associated with being an independent public company and our ability to comply with the internal control and reporting obligations of
                        public companies; and
                   •    our substantial indebtedness and the restrictions our credit agreement imposes on our business.

                 We do not intend, and undertake no obligation, to update any of our forward-looking statements to reflect actual results, changes in circumstances,
            assumptions or beliefs, or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such
            forward-looking statements.

                                                                                           64




72 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                                 MARKET DATA

                   Unless otherwise expressly stated or the context otherwise requires, industry, market and demographic data appearing in this prospectus, including
            information relating to the telecommunications industry, are derived principally from publicly available information, industry publications, data from
            market research firms and other third-party sources and estimates by our management, and management estimates are based upon information from the
            foregoing sources, data from our internal research and assumptions made by us based on such data and our knowledge of our industry and markets. Our
            management estimates and internal research have not been verified by any independent source, and we have not independently verified any third-party
            information. While we believe the industry, market and demographic data included in this prospectus is generally reliable, such information is inherently
            imprecise. In addition, projections, assumptions and estimates of our future performance, industry or market conditions, and demographics are necessarily
            subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause
            results to differ materially from those expressed in the estimates made by third parties and by us. If any one or more of these assumptions turn out to be
            incorrect, actual market results may differ from those predicted. While we do not know what impact any such differences may have on our business, if there
            are such differences, they could have a material adverse effect on our future results of operations and financial condition, and the trading price of our
            ADSs.

                                                                                         65




73 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                               USE OF PROCEEDS

                   We estimate that we will receive net proceeds of approximately $        million from the sale by us of ADSs offered in this offering, after
            deducting the underwriting discount and estimated offering expenses payable by us. We intend to use the net proceeds received by us in connection with
            this offering for general corporate purposes.

                  In connection with the termination of the management services agreements with certain of our shareholders and their affiliates, we will pay
            approximately $        million to such counterparties, on the date of the consummation of this offering, using a portion of the proceeds of this offering. See
            “Certain Relationships and Related Party Transactions—Management Services Agreements.”

                  We will not receive any proceeds from the sale of approximately $             million of ADSs to be offered by the selling shareholders. See “Principal
            and Selling Shareholders.”

                                                                                          66




74 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                      CORPORATE REORGANIZATION

                  Prior to this offering, we have conducted our business through Skype Global S.à r.l., a Luxembourg limited liability company (société à
            responsabilité limitée), and its subsidiaries. Skype S.à r.l., a Luxembourg limited liability company (société à responsabilité limitée), and the registrant
            was formed for the purpose of making this offering. Skype S.à r.l., currently a wholly-owned subsidiary of Skype Global S.à r.l., does not engage in any
            operations and has only nominal assets, including a 100% interest of Skype Global Holdco S.à r.l., a Luxembourg limited liability company (société à
            responsabilité limitée), which itself does not engage in any operations and holds no material assets. The corporate reorganization will consist of the
            following principal steps:
                   •    Skype S.à r.l., formed as a Luxembourg limited liability company (société à responsabilité limitée) subsidiary of Skype Global S.à r.l., and
                        holding the entire capital of Skype Global Holdco S.à r.l., will change its form and convert into a Luxembourg joint stock company (société
                        anonyme), Skype S.A.
                   •    After the conversion, all shareholders of Skype Global S.à r.l. will contribute in kind and exchange their shares in Skype Global S.à r.l.
                        against newly issued shares in Skype S.A. Skype S.A. shares held by Skype Global S.à r.l. will be cancelled.
                   •    Upon completion of such contribution in kind, the articles of incorporation of Skype S.A. will be amended and restated, the re-composition of
                        our board will be approved and Skype S.A. will enter into an amended and restated shareholders agreement with its shareholders.
                   •    Skype S.A. then will in turn contribute all shares of Skype Global S.à r.l. to Skype Global Holdco S.à r.l. against the issue by Skype Global
                        Holdco S.à r.l. of shares of two different classes, namely class A and class B.
                   •    Once Skype Global S.à r.l. is the wholly owned subsidiary of Skype Global Holdco S.à r.l., the articles of incorporation of Skype Global
                        S.à r.l. will be amended and restated.

                   See “Principal and Selling Shareholders” for more information on the ordinary shares held by our directors, named executive officers, more than 5%
            shareholders and selling shareholders. Investors in this offering will only receive, and this prospectus only describes the offering of, ADSs representing
            ordinary shares of Skype S.A. See “Description of Share Capital” for additional information regarding the terms of our certificate of incorporation and the
            rights attached to our ordinary shares.

                   In connection with the corporate reorganization, each outstanding stock option granted by Skype Global S.à r.l. to our employees, directors, service
            providers and consultants under the Skype Equity Incentive Plan will be assumed by Skype S.A. and converted into an equivalent stock option to purchase
            ordinary shares of Skype S.A. The Skype Equity Incentive Plan will also be assumed by Skype S.A. From and after the completion of this offering, each
            stock option will be deemed to constitute a stock option to acquire, on the same terms and conditions as were applicable under the Skype Equity Incentive
            Plan, a number of Skype S.A. ordinary shares equal to the product of (1) the number of shares of Skype Global ordinary shares otherwise purchasable
            pursuant to such stock option and (2)                     , rounded down, if necessary, to the nearest whole share; and such stock option to acquire Skype
            S.A. ordinary shares will have an exercise price per share equal to (1) the exercise price per share of the Skype Global stock option, divided by
            (2)         , rounded up to the nearest cent. After the completion of this offering, any employee, director, service provider or consultant acquiring ordinary
            shares of Skype S.A. pursuant to the exercise of a stock option will hold such shares directly and not through Skype Management L.P. as was required prior
            to the completion of this offering.

                                                                                         67




75 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                     http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                   Our corporate reorganization will not affect our operations, which we will continue to conduct through our operating subsidiaries. The following
            chart reflects our corporate structure after consummation of this offering, after giving effect to the corporate reorganization:




            (1)   Includes Silver Lake, CPP Investment Board Private Holdings Inc., Andreessen Horowitz, eBay, Joltid, Charleston Investment Holdings Limited and certain of their affiliates. See “Principal and Selling
                  Shareholders.”
            (2)   Prior to this offering, employees, directors and consultants who invested in Skype Global or who acquired ordinary shares pursuant to the exercise of any stock option granted under the Skype Equity
                  Incentive Plan held their equity interest in Skype Global through Skype Management, L.P. (“Skype Management”), an exempted limited partnership organized under the laws of the Cayman Islands,
                  which is a shareholder in Skype Global, primarily to enable Skype Global to comply with the limitation on the number of record holders of its ordinary shares under applicable law. Skype Management
                  received such acquired shares on behalf of the employees, directors and consultants and issued a corresponding number of partnership units to the employees, directors and consultants. In connection with
                  this offering, the partnership will terminate and be wound up and Skype Management’s ordinary shares in Skype Global will be distributed to the employees, directors and consultants according to their
                  respective numbers of partnership units.

                                                                                                                  68




76 of 341                                                                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                               DIVIDEND POLICY

                   We do not anticipate making any dividends or other distributions on our ordinary shares in the foreseeable future. We anticipate that we will retain
            all of our available funds for use in the operation and development of our business. Any future determination to make dividends or other distributions will
            be at the discretion of the general meeting of our shareholders or, with respect to interim dividends or distributions, our board of directors, and will
            depend on, among other things, our financial condition, results of operations, cash needs, plans for expansion, tax considerations, available net profits and
            reserves, limitations under Luxembourg law and other factors that our board of directors considers to be relevant. In addition, covenants in instruments and
            agreements may restrict our ability to make cash, including the Amended Five Year Credit Agreement, or dividends or other distributions on our ordinary
            shares.

                                                                                         69




77 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                       http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                                                       CAPITALIZATION

                    The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2010:
                        •   on an actual basis; and
                        •   on an as adjusted basis to give effect to our corporate reorganization and to reflect our receipt of the estimated net proceeds from this offering,
                            based on an assumed initial public offering price of $         per ADS (the mid-point of the price range set forth on the cover page of this
                            prospectus) and after deducting the estimated underwriting discount and estimated offering expenses payable by us, the payment of
                            approximately $          million to certain of our shareholders upon the consummation of this offer in connection with the termination of our
                            management service agreements with them, and the application of such net proceeds as described under “Use of Proceeds.”

                  You should read the information in the following table together with “Corporate Reorganization,” “Management’s Discussion and Analysis of
            Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

                                                                                                                                                                              As of June 30, 2010
                                                                                                                                                                          Actual               As Adjusted
                                                                                                                                                                           (thousands of U.S. dollars)
                                                                                                                                                                                  (unaudited)
                            Cash and cash equivalents                                                                                                                $ 85,493                 $
                            Total outstanding debt(1)                                                                                                                $ 727,912                $
                            Shareholder’s equity:
                            Common stock classes A,B,C,D,E,F,G,H,I,J, $0.01 par value, 944,495 shares of each of
                              the 10 classes issued, authorized and outstanding as of June 30, 2010 (actual); ordinary
                              shares, $0.01 par value,         shares authorized,          shares issued and
                              outstanding (as adjusted)(2)                                                                                                                   94
                            Management co-investment loan receivable                                                                                                     (4,305)
                            Additional paid-in capital                                                                                                                2,326,832
                            Warrants                                                                                                                                     17,214
                            Accumulated deficit                                                                                                                         (86,600)
                            Accumulated other comprehensive income                                                                                                        1,119
                            Total shareholders’ equity                                                                                                                2,254,354
                            Total capitalization                                                                                                                     $2,982,266               $
            (1)   Consists of outstanding term loan under our Amended Five Year Credit Agreement.
            (2)   The number of ordinary shares issued and outstanding, as adjusted to give effect to our corporate reorganization and this offering, does not include:
                    •             ordinary shares issuable upon the exercise of stock options granted to our employees, directors, service providers and consultants outstanding at June 30, 2010 under the Skype Equity
                            Incentive Plan with an exercise price of $        per share;

                    •             ordinary shares issuable upon the exercise of stock options granted to our employees, directors, service providers and consultants after June 30, 2010 under the Skype Equity Incentive
                            Plan with an exercise price of $         per share;

                    •            ordinary shares reserved for future issuance under the Skype Equity Incentive Plan; for a discussion of the Skype Equity Incentive Plan, see “Executive Compensation—Compensation
                            Discussion & Analysis—Components of Executive Compensation—Long-Term Equity Incentives”; and

                    •             ordinary shares into which warrants granted to Joltid Limited on November 19, 2009, which are now held by SEP Investments Pty Limited, may be exercised at an exercise price of
                            $         per share (the warrants expire upon the earlier of November 19, 2019 and the occurrence of a reorganization event, as defined under the terms of the warrant). See below for more
                            information regarding the terms of the warrant.

                                                                                                                    70




78 of 341                                                                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Warrants
                  In connection with the Joltid Transaction, Joltid received warrants to purchase an additional 98,680 Skype Global shares, equivalent to a 1% equity
            stake at such time, exercisable until the earlier of November 19, 2019 or the closing of a reorganization event, as defined in the warrant agreement. On
            April 15, 2010, the warrants were transferred to SEP Investments Pty Limited, an entity unaffiliated with Joltid.

                   The exercise price of the warrants upon completion of this offering will be $         per ordinary share, and the holder of the warrants will be
            entitled to purchase          ordinary shares of Skype S.A. following the closing of the offering. A reorganization event includes any transaction pursuant to
            which all or substantially all of Skype Global’s outstanding shares are sold, exchanged or converted into cash, securities or other consideration. A
            reorganization event, however, excludes transactions with affiliates of Skype Global and transactions where Skype Global’s shareholders prior to the
            reorganization event retain majority control of the surviving entity following such event. Upon the occurrence of a reorganization event, the warrant holder
            will receive such consideration with a fair market value equal to the difference between the amount the holder would have received in the reorganization
            event had it exercised all of its warrants immediately prior to such event, less the amount it would have had to pay to exercise the warrants. The corporate
            reorganization described elsewhere in this prospectus is not a reorganization event under the warrant agreement, but instead Skype S.A. will assume the
            warrants and the warrant holder will have a right thereunder to a number of Skype S.A. shares equal to the number of shares that the holder would have
            received had it exercised the warrants immediately prior to the corporate reorganization.

                                                                                         71




79 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                                    DILUTION

                  If you invest in our ADSs, your ownership interest will be diluted to the extent of the difference between the initial public offering price per ADS
            and the net tangible book value per ADS upon the completion of this offering. Net tangible book value represents our total tangible assets (total assets less
            intangible assets) less total liabilities.

                   Our net tangible book value at June 30, 2010, after giving effect to the sale of        ADSs at an assumed initial public offering price of
            $         per ADS (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus) and after deducting the
            underwriting discount and estimated offering expenses payable by us, or “as adjusted net tangible book value”, would have been $             , or $        per
            ordinary share or $         per ADS. This represents an immediate increase in net tangible book value of $            per ordinary share or $         per ADS
            to existing shareholders and an immediate dilution of $          per ordinary share or $         per ADS to new investors, or        % of the assumed initial
            public offering price of $        per ordinary share or $          per ADS. The following table illustrates this dilution for investors in ADSs in this
            offering:

                               Assumed initial public offering price per ADS                                                             $
                                     Net tangible book value per ADS as of June 30, 2010, before giving effect to
                                        this offering                                                                         $
                                     Increase in net tangible book value per ADS attributable to this offering                $
                               As adjusted net tangible book value per ADS                                                               $
                               Dilution in as adjusted net tangible book value per ADS to investors in this offering                     $

                  A $1.00 increase (decrease) in the assumed initial public offering price of $           per ADS would increase (decrease) our as adjusted net tangible
            book value by $          , the as adjusted net tangible book value per ADS by $         and the dilution in as adjusted net tangible book value per ADS to
            investors in this offering by $         , assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same
            and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

                  The following table summarizes, as of June 30, 2010, the number of ordinary shares (in the form of ordinary shares or ADSs) purchased from us
            since inception, the total consideration paid to us and the average price per ordinary share and per ADS paid by existing shareholders and by new
            investors purchasing in this offering at an assumed initial public offering price of $       per ADS (the midpoint of the estimated initial public offering
            price range set forth on the front cover page of this prospectus), before deducting underwriting discount and estimated offering expenses payable by us.

                                                                                                                                         Total                  Average
                                                                                                       Shares Purchased               Consideration               Price
                                                                                                                                                             Per        Per
                                                                                                     Number       Percent         Amount       Percent      Share       ADS
            Existing shareholders                                                                                       %         $                   %     $         $
            New investors
            Total                                                                                                      100%       $               100%

                  A $1.00 increase or decrease in the assumed initial public offering price per ADS would increase or decrease, respectively, the total consideration
            paid by new investors by $       .

                                                                                         72




80 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                              http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                  If the underwriters exercise their option to purchase an additional          ADSs in this offering, the number of ordinary shares represented by ADSs
            held by new investors will increase to approximately            ordinary shares, or approximately           % of the total number of our then outstanding
            ordinary shares (including ordinary shares represented by ADSs), and the total consideration paid by new investors will increase to approximately
            $         , or approximately         % of the total consideration paid for our outstanding ordinary shares (in the form of ordinary shares or ADSs),
            assuming an initial public offering price of $         per ADS (the mid-point of the estimated price range set forth on the cover page of this prospectus).

                   The foregoing discussion and tables assume the completion, prior to the effectiveness of the registration statement of which this prospectus forms a
            part, of our corporate reorganization and that the number of ordinary shares that will be outstanding immediately after this offering is based on
            ordinary shares outstanding on June 30, 2010, plus the          ordinary shares to be sold by us in the form of ADSs in this offering, and excludes the
            following ordinary shares:
                   •            ordinary shares issuable upon the exercise of stock options granted to our employees, directors, service providers and consultants
                        outstanding at June 30, 2010 under the Skype Equity Incentive Plan with an exercise price of $        per share;
                   •             ordinary shares issuable upon the exercise of stock options granted to our employees, directors, service providers and consultants
                        after June 30, 2010 under the Skype Equity Incentive Plan with an exercise price of $         per share;
                   •            ordinary shares reserved for future issuance under the Skype Equity Incentive Plan; for a discussion of the Skype Equity Incentive
                        Plan, see “Executive Compensation—Compensation Discussion & Analysis—Components of Executive Compensation—Long-Term Equity
                        Incentives”; and
                   •            ordinary shares into which warrants granted to Joltid Limited on November 19, 2009, which are now held by SEP Investments Pty
                        Limited, may be exercised at an exercise price of $         per share (the warrants expire upon the earlier of November 19, 2019 and the
                        occurrence of a reorganization event, as defined under the terms of the warrant). See “Capitalization—Warrants” for more information
                        regarding the terms of the warrant.

                  To the extent that any of the foregoing warrants and options are exercised, there may be further dilution to investors in this offering.

                                                                                           73




81 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                                       SELECTED FINANCIAL DATA

                  The following selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and
            Results of Operations,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” our audited consolidated financial statements as of
            December 31, 2009 and for the Successor period from November 19, 2009 to December 31, 2009, the Predecessor period from January 1, 2009 to
            November 18, 2009, and as of and for the Predecessor year ended December 31, 2008 and for the Predecessor year ended December 31, 2007, as well as
            our unaudited interim condensed consolidated financial statements as of and for the six month Successor period ended June 30, 2010 and for the six month
            Predecessor period ended June 30, 2009, and their respective notes included elsewhere in this prospectus.

                  On November 19, 2009, Skype Global acquired the Communications business segment of eBay, which consisted of the assets and liabilities of the
            Skype Companies (which we refer to as the “Skype Acquisition”). As a result of the Skype Acquisition, the financial results for the year ended
            December 31, 2009 have been presented for the Predecessor for the period from January 1, 2009 to November 18, 2009, and for the Successor for the
            period from November 19, 2009 to December 31, 2009.

                  In addition, on October 14, 2005, eBay acquired the Skype Companies (with the exception of Skype Holdings, which eBay formed to consummate the
            acquisition in 2005; one of the Skype Companies, Sonorit, which eBay acquired in April 2006; and certain indirect subsidiaries of Skype Global
            incorporated subsequent to the acquisition by eBay) (which we refer to as the “eBay Acquisition”). Accordingly, the selected financial results for the year
            ended December 31, 2005 have been presented for the pre-eBay predecessor entity (which we refer to as the “Pre-eBay Predecessor”) prior to the eBay
            Acquisition for the period from January 1, 2005 to October 13, 2005 and for the Predecessor following the eBay Acquisition for the period from
            October 14, 2005 to December 31, 2005.

                  Our selected statement of operations data and cash flows data for the Predecessor years ended December 31, 2008 and 2007, for the Predecessor
            period from January 1, 2009 to November 18, 2009 and for the Successor period from November 19, 2009 to December 31, 2009, as well as the
            Predecessor balance sheet data as of December 31, 2008 and the Successor balance sheet data as of December 31, 2009, have been derived from audited
            consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) and
            are included elsewhere in this prospectus. The selected statement of operations data below for the Pre-eBay Predecessor period from January 1, 2005 to
            October 13, 2005, for the Predecessor period from October 14, 2005 to December 31, 2005 and for the Predecessor year ended December 31, 2006, as
            well as the Predecessor combined balance sheet data below as of December 31, 2005, 2006 and 2007, are derived from unaudited financial statements that
            were prepared on the basis of U.S. GAAP. The selected statement of operations data below as of and for the six month Successor period ended June 30,
            2010 and for the six month Predecessor period ended June 30, 2009 are unaudited and have been prepared under U.S. GAAP.

                  The Skype Acquisition was accounted for as a business combination using the acquisition method and resulted in a new basis of accounting in the
            acquired Skype Companies. Accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair value at the acquisition
            date on November 19, 2009. The excess of purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as
            goodwill (see Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for further information). The vertical lines
            separating the Successor, Predecessor and Pre-eBay Predecessor financial data in this prospectus are included to highlight the lack of comparability
            between these accounts due to the period durations and new basis of accounting resulting from the Skype Acquisition and the eBay Acquisition,
            respectively.

                   The Predecessor financial statements include 100% of the assets and liabilities of the Skype Companies and have been presented on a combined
            basis. The Predecessor financial statements include allocations of certain

                                                                                        74




82 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            eBay expenses including centralized legal, tax, treasury, information technology, employee costs, corporate services and other infrastructure costs,
            collectively referred to as “corporate allocations.” The corporate allocations have been determined on a basis that we considered to be reasonable
            reflections of the utilization of services provided to us or the benefit received by us. Additionally, certain other expenses incurred by eBay for the direct
            benefit of the Predecessor have been included in the Predecessor financial statements. See “Certain Relationships and Related Party Transactions” and
            Note 13 to our audited consolidated financial statements included elsewhere in this prospectus. We believe that the estimates, assumptions, and
            methodology underlying the allocation of these expenses as reflected in the Predecessor financial statements are reasonable; however, actual expenses may
            have differed materially from these allocations had the Predecessor operated independently of eBay for the periods presented. The Predecessor financial
            statements and selected financial data do not purport to reflect what the results of operations, financial position or cash flows would have been had the
            Predecessor operated as an independent company during the periods presented nor do they purport to indicate what the Successor results of operations,
            cash flows or financial position will be as of any future date or for any future period.

                  For presentation purposes, we refer in this prospectus to the Predecessor’s combined financial statements and the Successor’s consolidated financial
            statements collectively as our “consolidated financial statements.”

                                                                                         75




83 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                     http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Selected Statement of Operations Data from 2005 to 2009

                                                                     Pre-eBay
                                                                    Predecessor                                                 Predecessor                                                            Successor
                                                                    January 1 to           October 14 to       Year ended      Year ended           Year ended              January 1 to             November 19 to
                                                                    October 13,            December 31,       December 31,    December 31,         December 31,            November 18,               December 31,
                                                                       2005                    2005              2006              2007                 2008                   2009                      2009
                                                                                                                   (thousands of U.S. dollars, except share data)
            Selected Statement of Operations Data:
            Net revenues:                                           $       47,076         $        24,809    $        193,696     $      381,551       $       551,364    $       626,458           $           92,445
            Cost of net revenues(1)                                         33,729                  17,842             140,107            228,638               290,053            293,533                       44,836(2)
                     Gross profit                                           13,347                   6,967              53,589            152,913               261,311            332,925                       47,609
            Operating expenses:
                     Sales and marketing(1)                                 14,200                  13,097               59,787            67,195                85,630             111,029                      17,267
                     Product development(1)                                  5,027                   6,536               38,900            22,078                31,124              34,993                       5,809
                     General and administrative(1)(3)                       11,588                   5,787               37,865            41,169                51,863              50,208                     113,284(4)
                     Amortization of acquired intangible assets               —                     13,694               60,156            65,514                69,832              55,453                      13,284(2)
                     Litigation settlement                                    —                       —                    —                 —                     —                343,826(5)                     —
                     Impairment of goodwill                                   —                       —                    —            1,390,938(6)               —                   —                           —
                              Total operating expenses                      30,815                  39,114              196,708         1,586,894               238,449             595,509                     149,644
            (Loss)/income from operations                                  (17,468)                (32,147)            (143,119)       (1,433,981)               22,862            (262,584)                   (102,035)
            Interest income and other (expense), net                           272                     493                2,029             5,303                10,297              (2,549)                      5,492
            Interest expense                                                  —                       —                    —                 —                     —                   —                        (10,387)(7)
            (Loss)/income before income taxes                              (17,196)                (31,654)            (141,090)       (1,428,678)               33,159            (265,133)                   (106,930)
            Income tax (benefit)/expense                                     1,141                  (2,380)             (22,044)          (23,342)               (8,447)              3,950                      (7,209)
            Net income (loss)                                       $      (18,337)        $       (29,274)   $        (119,046)   $   (1,405,336)      $        41,606    $       (269,083)         $          (99,721)
            Basic and diluted net loss per share (Class A through
               J):(8)                                                                                                                                                                                $           (10.59)
            Weighted number of shares, basic and diluted (Class
               A through J):(8)                                                                                                                                                                               9,414,600
            (1)   Figures for the periods shown below include stock-based compensation expense as follows:
            (2)   Cost of net revenues and amortization of acquired intangible assets for the Successor period from November 19, 2009 to December 31, 2009 include $4.2 million and $13.3 million of amortization costs,
                  respectively, relating to the amortization of the intangible assets acquired in the Skype Acquisition. The increase from the Predecessor period is a result of the Skype Acquisition, whereby the gross
                  carrying amount of intangible assets increased from $340.5 million as of December 31, 2008 to $805.6 million as of December 31, 2009.
            (3)   The consummation of this offering will trigger payments under management services agreements entered into in connection with the Skype Acquisition in aggregate amount of $                 million. See
                  “Certain Relationships and Related Party Transactions—Management Service Agreements.”
            (4)   This amount includes $98.7 million of transaction fees and expenses incurred in connection with the Skype Acquisition.
            (5)   This amount represents the net charge incurred by us in connection with the settlement that we and eBay reached with Joltid regarding our use of the “Global Index” technology that facilitates
                  communications in the peer-to-peer network of Skype users. For more information regarding this settlement and the Joltid Transaction generally, please refer to “Management’s Discussion and Analysis
                  of Financial Condition and Results of Operations—Key Factors Affecting Results of Operations,” “Certain Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid
                  Transaction” and Note 13 to our audited consolidated financial statements included elsewhere in this prospectus.
            (6)   This amount represents the impairment in 2007 of the goodwill recorded in connection with our acquisition by eBay in 2005. As a result of the assessment in 2007 that the carrying value of that goodwill
                  exceeded its fair value, an impairment charge of $1.4 billion was recorded. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results
                  of Operations—Impairment of Goodwill” and Note 4 to our audited consolidated financial statements included elsewhere in this prospectus.

                                                                                                                  76




84 of 341                                                                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            (7)   This amount represents the net interest expense, including amortization of original issuance discount and deferred financing cost, incurred for the Successor period from November 19, 2009 to
                  December 31, 2009 in connection with the indebtedness incurred to finance the Skype Acquisition, as described further under “Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations—Liquidity and Capital Resources—Indebtedness.”
            (8)   Per share information is not provided for the Predecessor periods from October 14, 2005 to November 18, 2009 because the Predecessor financial statements have been prepared on a combined basis
                  and have an equity structure reflecting eBay’s net investment in the Skype Companies. In addition, we have not provided per share information for the Pre-eBay Predecessor period as the information
                  does not provide a meaningful comparison to the operations of the entity subsequent to the eBay Acquisition in 2005 or the Skype Acquisition in 2009.

                                                                        Pre-eBay
                                                                       Predecessor                                                    Predecessor                                                        Successor
                                                                        January 1
                                                                           to                October 14 to        Year ended          Year ended        Year ended           January 1 to            November 19 to
                                                                       October 13,           December 31,        December 31,       December 31,      December 31,          November 18,              December 31,
                                                                          2005                   2005               2006                 2007              2008                 2009                      2009
                                                                                                                                 (thousands of U.S. dollars)
            Cost of net revenues                                       $        —            $          —        $         2,141    $          200    $         (145)       $           331          $                6
            Sales and marketing                                                2,897                   7,681              10,247             1,953             4,570                  8,564                         111
            Product development                                                4,024                   4,658              13,303             3,883             5,443                  2,910                          92
            General and administrative                                         1,561                   2,980               7,378             4,233             2,958                  2,680                          52
            Total                                                      $       8,482         $        15,319     $        33,069    $       10,269    $       12,826        $        14,485          $              261


                                                                                                                77




85 of 341                                                                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                  Selected Statement of Operations Data for the Six Month Successor Period ended June 30, 2010 and the Six Month Predecessor Period ended
                  June 30, 2009
                   Results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results of operations that may be achieved for the
            entire year.

                                                                                                                                      Predecessor                                   Successor
                                                                                                                                   Six months ended                             Six months ended
                                                                                                                                     June 30, 2009                                June 30, 2010
                                                                                                                                           (thousands of U.S. dollars, except share data)
                             Net revenues:                                                                                         $        324,838                                    $        406,170
                             Cost of net revenues(1)                                                                                        161,138                                             199,820(2)
                                    Gross profit                                                                                            163,700                                             206,350
                             Operating expenses:
                                    Sales and marketing(1)                                                                                   57,343                                              70,998
                                    Product development(1)                                                                                   20,549                                              29,950
                                    General and administrative(1)                                                                            23,681                                              46,824
                                    Amortization of acquired intangible assets                                                               31,147                                              57,154(2)
                                          Total operating expenses                                                                          132,720                                             204,926
                             Income (loss) from operations                                                                                   30,980                                               1,424
                             Realized loss on amended credit agreement                                                                          —                                               (13,513)(3)
                             Interest income and other (expense), net                                                                        (6,119)                                             31,330
                             Interest expense                                                                                                   —                                               (35,606)(4)
                             (Loss)/income before income taxes                                                                               24,861                                             (16,365)
                             Income tax expense / (benefit)                                                                                   2,327                                             (29,486)
                             Net income                                                                                            $         22,534                                    $         13,121
                             Basic and diluted net income per share (Class A through I):(5)                                                                                            $            —
                             Basic and diluted net income per share (Class J):(5)                                                                                                      $          13.88
                             Weighted number of shares, basic and diluted (Class A through
                                I): (5)                                                                                                                                                      8,486,873
                             Weighted number of shares, basic and diluted
                                (Class J): (5)                                                                                                                                                  942,986
            (1)    Includes stock-based compensation expense as follows:


                                                                                                                                        Predecessor                                       Successor
                                                                                                                                     Six months ended                                 Six months ended
                                                                                                                                       June 30, 2009                                    June 30, 2010
                                                                                                                                               (thousands of U.S. dollars, except share data)
                             Cost of net revenues                                                                                    $              369                               $               51
                             Sales and marketing                                                                                                  3,705                                            1,722
                             Product development                                                                                                  3,309                                              813
                             General and administrative                                                                                           1,453                                              495
                             Total                                                                                                   $            8,836                               $            3,081
            (2)    Cost of net revenues and amortization of acquired intangible assets for the Successor six months ended June 30, 2010 include $18.1 million and $57.2 million of amortization costs, respectively, relating to
                   the amortization of the intangible assets acquired in the Skype Acquisition. The increase from the comparable period in 2009 is a result of the Skype Acquisition, whereby the gross carrying amount of
                   intangible assets increased from $340.5 million as of December 31, 2008 to $805.6 million as of December 31, 2009.

                                                                                                                     78




86 of 341                                                                                                                                                                                                           8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                     http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            (3)   This amount represents the expense incurred in connection with the amendment of our Amended Five Year Credit Agreement in February 2010, described under “Management’s Discussion and Analysis
                  of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”
            (4)   This amount represents the net interest expense, including amortization of original issuance discount and deferred financing cost, incurred for the six months ended June 30, 2010 in connection with the
                  outstanding indebtedness incurred to finance the Skype Acquisition, described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
                  Resources—Indebtedness.”
            (5)   Per share information is not provided for the Predecessor six months ended June 30, 2009 because the Predecessor financial statements have been prepared on a combined basis and have an equity
                  structure reflecting eBay’s net investment in the Skype Companies.


            Selected Balance Sheet Data

                                                                                                                                      Predecessor                                               Successor
                                                                                                                                                                                        As of              As of
                                                                                                                                  As of December 31,
                                                                                                                                                                                     December 31,         June 30,
                                                                                                                2005             2006              2007           2008                   2009               2010
                                                                                                                                                     (thousands of U.S. dollars)
            Selected Balance Sheet Data:
            Cash and cash equivalents                                                                      $    88,156 $ 92,837 $ 115,884 $ 260,187                                  $ 114,077(1)            $    85,493
            Total current assets                                                                               107,352   121,953   154,234   319,804                                    202,445                  182,586
            Property and equipment, net                                                                          1,023     7,123     9,075     6,040                                     13,238                   19,252
            Goodwill                                                                                         2,312,359 2,575,931 1,919,341 1,836,562                                  2,372,779(2)             2,372,779
            Intangible assets, net                                                                             263,406   235,711   188,204   112,934                                    788,118(3)               712,903
            Total assets                                                                                     2,684,286 2,944,758 2,275,410 2,282,535                                  3,409,704                3,312,817

            Accrued expenses and other current liabilities                                                     20,187     39,658     46,359     65,159                                    90,852                 99,548
            Deferred revenue and user advances                                                                 22,429     56,219     89,419    108,012                                   142,600                150,250
            Total current liabilities                                                                          52,684    111,740    170,463    219,893                                   302,246                317,272
            Long term debt(4)                                                                                     —          —          —          —                                     772,220                690,107
            Total liabilities                                                                                 115,694    150,730    186,007    222,493                                 1,172,131              1,058,463
            Total invested / shareholders’ equity                                                           2,568,592 2,794,028 2,089,403 2,060,042                                    2,237,573              2,254,354
            Total liabilities and invested / shareholders’ equity                                          $2,684,286 $2,944,758 $2,275,410 $2,282,535                               $ 3,409,704             $3,312,817
            (1)   Cash and cash equivalents decreased as of December 31, 2009 compared to December 31, 2008 primarily as a result of the repayment to eBay of a portion of its investment in the Skype Companies in
                  the amount of $271.8 million immediately prior to the completion of the Skype Acquisition, as described in Note 1 to our audited consolidated financial statements included elsewhere in this prospectus.
            (2)   This amount represents the excess of purchase price over the tangible assets, identifiable intangible assets and assumed liabilities in the Skype Acquisition, which has been recorded as goodwill.
            (3)   This amount represents the identifiable intangible assets acquired in connection with the Skype Acquisition and the Joltid Transaction. As a result of the Skype Acquisition, the gross carrying amount of
                  intangible assets increased from $340.5 million as of December 31, 2008 to $805.6 million as of December 31, 2009.
            (4)   These amounts represent the outstanding amount as of December 31, 2009 and June 30, 2010 of long-term debt incurred to finance the Skype Acquisition, as described under “Management’s Discussion
                  and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

                                                                                                                  79




87 of 341                                                                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                     http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Selected Cash Flow Data

                                                                                             Predecessor                                           Successor                     Predecessor               Successor
                                                                                                                                                                                  Six months               Six months
                                                                      Year ended              Year ended            January 1 to           November 19 to                            ended                    ended
                                                                     December 31,            December 31,          November 18,             December 31,                           June 30,                 June 30,
                                                                        2007                     2008                  2009                      2009                                 2009                    2010
                                                                                                                             (thousands of U.S. dollars)
            Selected Cash Flow Data:
            Net cash provided by (used in)
               operating activities:                                 $     80,220            $ 148,801             $ 128,049                   $     (150,913)(2)                $ 93,976                  $ 64,830
            Net cash provided by (used in)
               investing activities:                                     (536,020)(1)               (4,964)              (11,733)                  (1,958,981)(3)                     (5,264)               (12,869)
            Net cash provided by (used in)
               financing activities:                                     468,354(1)                 13,305             (263,302)                    2,082,013(4)                         —                  (67,234)(5)
            (1)   This amount primarily reflected a $530.3 million cash payment by eBay pursuant to an earn-out settlement agreement with certain former shareholders of the Pre-eBay Predecessor and the earn-out
                  representative. Financing activities to finance this payment resulted in a corresponding increase in net cash provided by financing activities.
            (2)   This amount was impacted by outgoing cash payments of $94.4 million in connection with the Joltid litigation settlement as part of the overall Joltid Transaction. For more information see “Certain
                  Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid Transaction” and Note 13 to our audited consolidated financial statements included elsewhere in this prospectus.
                  In addition, net cash of $98.7 million was also paid as fees and expenses in connection with the Skype Acquisition.
            (3)   This amount includes $1.9 billion in cash paid to eBay as a portion of the consideration in the Skype Acquisition. In addition, $34.6 million was paid to acquire intangible assets as part of the Joltid
                  Transaction we entered into prior to the Skype Acquisition.
            (4)   This amount includes $681.7 million net proceeds from indebtedness incurred in connection with the Skype Acquisition and $1.4 billion in net cash proceeds from the issuance of common stock in the
                  Skype Acquisition.
            (5)   This amount primarily reflects the refinancing of our Amended Five Year Credit Agreement and the contemporaneous repayment of the entire $125.0 million outstanding payment-in-kind loan agreement
                  with eBay.


            Key Metrics
                  We monitor certain key operating metrics that we believe drive our financial performance, including net revenues, and that we use to measure usage
            during different periods of the year to manage our business and to help identify potential fraudulent activities. These metrics are derived from our
            operational systems, as opposed to our financial reporting systems. As our business evolves and we continue to gain further insight into our growing
            business, we may change the method of calculating our key operating metrics, enhance our operational systems to address uncertainties in these metrics or
            add new key operating metrics to reflect the changes in our business.

                  Our registered user metric is subject to a degree of overstatement. Other metrics are subject to uncertainties and inaccuracies and may be overstated
            or understated. For more information, see “Risk Factors—The number of our registered users overstates the number of unique individuals who register to
            use our products,” “—Our connected users metric is subject to uncertainties and may overstate the number of users who actively use our products,” “—Our
            paying user and communications services billing minutes metrics are subject to a degree of inaccuracy due to fraudulent transactions and our method of
            calculating these metrics.” and “—The peer-to-peer nature of our software architecture makes it difficult to determine certain operational metrics.”

                   We describe below how we calculate each of these metrics, as well as certain key assumptions relating to these metrics. We exclude from our
            registered, connected and paying user metrics those users that have become users through non-controlled entities in which we hold a minority interest
            because they do not contribute to net revenues in our statement of operations. As we present average revenue per paying user as a related metric, we
            believe it would not be appropriate to include paying users of such entities in this metric. Accordingly, we exclude registered, connected and paying users
            of our only non-controlled entity, Tel-Online Limited, which is our Chinese investment in which we hold a 49% interest and our partner, Tom Online,
            holds a majority interest. We also exclude from our communications services billing minutes metric minutes of Skype users through Tel-Online Limited.

                                                                                                                  80




88 of 341                                                                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                   Registered users. We calculate registered users as the cumulative number of user accounts at the end of the relevant period. The registered user
            figure overstates the number of unique users because, among other things, users may register more than once and, as a result, may have more than one
            account and some users engage in fraudulent activities that result in the creation of spurious user accounts.

                  Connected users. We calculate connected users as the number of user accounts, averaged over a three month period, that log in to the Skype
            software client, either manually or automatically, in a given calendar month. We also include in connected users the number of users, averaged over a three
            month period, who have a valid Skype software certificate (for example, a mobile phone with the Skype software client installed) that is checked and has
            been validated during the past thirty days.

                  The number of connected users is subject to uncertainties and may not be indicative of users actively using our products during a given period. For
            example, for a number of our users, once a user has downloaded our software onto their device, the software will automatically be logged in to when the
            device is turned on even if the customer takes no steps to affirmatively engage our software client after initial registration. In addition, a number of
            connected users in a given period includes the creation and use of spurious user accounts. By contrast, users accessing Skype from behind a firewall may
            not be captured in our systems as connected users.

                   Paying users. We calculate paying users as the number of unique user accounts, averaged over a three month period, who make a successful
            SkypeOut call using Skype credit on a pay-as-you-go basis in a given calendar month or that had an active subscription at any time during such calendar
            month. A user need not be logged in to the Skype software client to be considered as having made a successful SkypeOut call; for example, the user may
            utilize our Skype-to-Go or Call Forwarding paid products, which do not require users to log in to the Skype software client. Thus, there may be user
            accounts in a particular period that are counted as paying users but are not counted as connected users. We strive to eliminate from our number of paying
            users any users who only made SkypeOut calls utilizing promotional, free Skype credit or promotional subscriptions services. Our operational systems may
            fail to classify properly these users, and accordingly this metric is subject to potential inaccuracies.

                   Communications services billing minutes. We calculate communications services billing minutes as the cumulative number of minutes that Skype
            users were connected to our communications services products, which mainly comprise billing minutes related to SkypeOut calls to traditional fixed-line
            or mobile telephones during a relevant period. A user does not need to be logged in to the Skype software client to register a billing minute; for example,
            the user may make a Skype-to-Go call or use Call Forwarding, which do not require users to log in to the Skype software client. Due to the rounding up of
            our billing system, this number will exceed the aggregate number of minutes of such calls our users made. We strive to eliminate from this number minutes
            attributable to SkypeOut calls made utilizing promotional, free Skype credit or promotional subscriptions services, or other free calls. Our operational
            systems may fail to classify properly these minutes, and accordingly this metric is subject to potential inaccuracies.

                  Skype-to-Skype minutes. We define Skype-to-Skype minutes as an estimate of the number of minutes in which a Skype user is simultaneously
            connected via a free Skype call with another Skype user. We derive this by collecting reports at regular intervals from selected points in the Skype user
            network and aggregating them in order to quantify the number of parallel calls. The estimated activity is designed to count one Skype-to-Skype minute per
            minute of conversation between two simultaneous users on a call, and 0.5 Skype-to-Skype minutes per minute of conversation for each additional user on a
            multi-party call involving three or more users.

                                                                                         81




89 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                      http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                  The table below shows our registered users as of the relevant dates specified below as well as the average monthly connected users and average
            monthly paying users for the three months ended on the relevant dates specified below. Unless otherwise specified, the terms “average monthly connected
            user” and “average monthly paying user” as used below and in this prospectus represent a three month average of the relevant user metrics for each month
            within the period. Therefore, our average monthly connected users and our average monthly paying users are shown for the three months ending each
            period, which represents the sum of the monthly connected user and monthly paying user figures, respectively, for each individual month, divided by three.

                                                                                                                                           As of or for the three months ended, as applicable,
                                                                                                                    December 31,           December 31,         December 31,               June 30,               June 30,
                                                                                                                       2007                   2008                   2009                    2009                   2010
                                                                                                                                                                 (millions)
            Registered users(1)                                                                                                217                     325                   474                      397              560
            Average monthly connected users(2)                                                                                  52                       75                  105                       91              124
            Average monthly paying users                                                                                       4.6                      5.8                   7.3                     6.6               8.1
            (1)   Our registered users as of December 31, 2007, 2008 and 2009 include 3 million, 17 million and 20 million, and as of June 30, 2009 and 2010 include 19 million and 20 million users, respectively, who
                  registered through their MySpace account. We believe the MySpace registered users are infrequent users of Skype products. We have notified MySpace that we do not intend to renew the contract,
                  through which users can register through MySpace, when it expires on November 27, 2010. The registered user numbers in the table above exclude users that have registered on Skype through our
                  investment to address the Chinese market, Tel-Online Limited; the number of users that registered through Tel-Online Limited amounted to 59 million, 80 million and 86 million as of December 31, 2007,
                  2008 and 2009, respectively, and 83 million and 88 million users as of June 30, 2009 and 2010, respectively.
            (2)   Our average monthly connected users for the three months ended December 31, 2007, 2008 and 2009 include 1 million, 4 million and 2 million, and for the three months ended June 30, 2009 and 2010
                  include 3 million and 1 million users, respectively, who registered through their MySpace account. We believe the MySpace connected users are infrequent users of Skype products. We have notified
                  MySpace that we do not intend to renew the contract, through which users can register and connect through MySpace, when it expires on November 27, 2010. The average monthly connected user
                  numbers in the table above exclude users that have connected to Skype through our investment to address the Chinese market, Tel-Online Limited; the average monthly connected users that connected
                  through Tel-Online Limited amounted to 4 million, 3 million and 2 million for the three months ended December 31, 2007, 2008 and 2009, respectively, and 2 million users for both the three months ended
                  June 30, 2009 and 2010.

                  The table below shows average communications services revenue per paying user for each of the periods presented. Average communications
            services revenue per paying user for a given fiscal year represents our net revenues derived from our communications services for such year divided by the
            average paying users for such year. For these purposes, “paying users” represent the average of the average monthly paying users for each of the four
            quarters in the relevant fiscal year. In addition, for purposes of comparison on an annual basis, the average communications services revenue per paying
            user for the six months ended June 30, 2009 and 2010 has been converted into annualized figures for the years 2009 and 2010 based on the six month net
            revenues in those years.

                                                                                                                          For the year ended                                    ANNUALIZED, based on data for the
                                                                                                                            December 31,                                           six months ended June 30,
                                                                                                                 2007            2008               2009                            2009                        2010
                                                                                                                                                           (U.S. dollars)
            Average communications services revenue per paying user                                             $ 81            $ 102           $     98                    $               94          $               96

                   The table below shows our communications services billing minutes and Skype-to-Skype minutes for each of the periods presented:

                                                                                                                          For the year ended
                                                                                                                            December 31,                                              For the six months ended,
                                                                                                                 2007            2008               2009                        June 30, 2009               June 30, 2010
                                                                                                                                                             (billions)
            Communications services billing minutes                                                               4.1             6.9             10.7                                      5.0                         6.4
            Skype-to-Skype minutes                                                                               43.4            65.5            113.0                                     49.1                        88.4

                                                                                                                  82




90 of 341                                                                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

                  The following unaudited pro forma condensed consolidated financial information for the year ended December 31, 2009 and the six months ended
            June 30, 2009 have been developed by applying pro forma adjustments to our historical consolidated financial statements for the Predecessor period from
            January 1, 2009 to November 18, 2009, the Successor period from November 19, 2009 to December 31, 2009 and the Predecessor period from January 1,
            2009 to June 30, 2009 appearing elsewhere in this prospectus. For presentation purposes, we refer in this prospectus to the Predecessor’s combined
            financial statements and the Successor’s consolidated financial statements collectively as our “consolidated financial statements.”

                  The unaudited pro forma condensed consolidated financial information for the year ended December 31, 2009 and the six months ended June 30,
            2009 gives effect to the Skype Acquisition as if it had occurred on January 1, 2009 and excludes certain non-recurring charges associated with the Skype
            Acquisition. The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The
            unaudited pro forma condensed consolidated financial information is presented for informational purposes only. The unaudited pro forma condensed
            consolidated financial information, which has been prepared and presented in accordance with Article 11 of Regulation S-X, does not purport to represent
            what our actual consolidated results of operations would have been had the Skype Acquisition actually occurred on the date indicated, nor is it necessarily
            indicative of future consolidated results of operations. The unaudited pro forma condensed consolidated financial information should be read in
            conjunction with the information contained in “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of
            Operations” and the historical consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. All pro forma
            adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma condensed consolidated financial
            information.

                                                                                        83




91 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                       http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 2009

                                                                                                                  Predecessor                           Successor                                                  Pro forma
                                                                                                                  Period from                          Period from
                                                                                                                  January 1 to                      November 19 to                                              Year ended
                                                                                                                 November 18,                         December 31,              Pro forma                      December 31,
                                                                                                                     2009                                  2009                adjustments                         2009
                                                                                                                                        (thousands of U.S. dollars, except per share information)
            Net revenues                                                                                         $ 626,458                            $        92,445              $       —                   $ 718,903
            Cost of net revenues                                                                                   293,533                                     44,836                   31,926(1)                370,295
                  Gross profit                                                                                     332,925                                     47,609                  (31,926)                  348,608
            Operating expenses:
                  Sales and marketing                                                                               111,029                                   17,267                  (2,200)(2)                  126,096
                  Product development                                                                                34,993                                    5,809                     —                         40,802
                  General and administrative                                                                         50,208                                  113,284                 (87,671)(3)                   75,821
                  Amortization of acquired intangible assets                                                         55,453                                   13,284                  45,570(4)                   114,307
                  Litigation settlement                                                                             343,826                                      —                       —                        343,826
                         Total operating expenses                                                                   595,509                                  149,644                 (44,301)                     700,852
            (Loss)/income from operations                                                                          (262,584)                                (102,035)                 12,375                     (352,244)
            Interest income and other (expense), net                                                                 (2,549)                                   5,492                     —                          2,943
            Interest expense                                                                                            —                                    (10,387)                (79,257)(5)                  (89,644)
            Loss before income taxes                                                                               (265,133)                                (106,930)                (66,882)                    (438,945)
            Income tax expense / (benefit)                                                                            3,950                                   (7,209)                (18,139)(6)                  (21,398)
            Net loss                                                                                             $ (269,083)                          $      (99,721)              $ (48,743)                  $ (417,547)

            Basic and diluted net loss per share (Class A through J):(7)                                                                              $         (10.59)                                        $      (44.35)
            Weighted number of shares, basic and diluted (Class A through
              J):(7)                                                                                                                                       9,414,600                                               9,414,600
            (1)   Reflects a net increase in cost of net revenues relating to the amortization of developed technology intangible assets acquired in connection with the Skype Acquisition. Acquired existing technologies
                  have useful lives ranging from three to seven years and are amortized on a straight-line basis.
            (2)   Reflects a decrease in sales and marketing expenses of $2.2 million relating to the elimination of cash bonus payments to certain Skype executives that vested upon the completion of the Skype
                  Acquisition.
            (3)   Reflects a net decrease in general and administrative expenses of $87.7 million relating to the elimination of transaction fees of $98.7 million directly relating to the Skype Acquisition, the elimination of
                  $1.5 million in cash bonus payments to certain Skype executives that vested upon the completion of the Skype Acquisition, and the addition of $12.5 million relating to monitoring fees that are payable
                  under management service agreements entered into with certain shareholders of Skype in connection with the Skype Acquisition. See “Certain Relationships and Related Party Transactions
                  —Management Service Agreements.”
            (4)   Reflects a net increase in the amortization of acquired intangible assets expenses including customer lists and user base (two to three year useful life), trademarks and trade names (ten year useful life)
                  and other intangible assets acquired in connection with the Skype Acquisition. Each of these intangible assets is amortized over its estimated useful life on a straight-line basis.
            (5)   Reflects an increase in interest expense of $79.3 million consisting of additional interest expense of $69.4 million on the Five Year Credit Agreement and the payment-in-kind loan agreement with eBay
                  entered into in connection with the Skype Acquisition, and $9.9 million relating to amortization of the original issuance discount and deferred financing costs associated with the Five Year Credit
                  Agreement.
            (6)   Reflects the income tax effect of the pro forma adjustments at the statutory tax rate in effect in the jurisdiction to which the underlying pro forma adjustment related.
            (7)   Per share information is not provided for the Predecessor period because the Predecessor financial statements have been prepared on a combined basis and have an equity structure reflecting eBay’s net
                  investment in the Skype Companies.

                                                                                                                    84




92 of 341                                                                                                                                                                                                           8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                       http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2009

                                                                                                                                Predecessor                                                                   Pro forma
                                                                                                                             Six months ended                                                             Six months ended
                                                                                                                               June 30, 2009                      Total Adjustments                         June 30, 2009
                                                                                                                                                               (thousands of U.S. dollars)
            Net revenues                                                                                                     $        324,838                     $             —                         $        324,838
            Cost of net revenues                                                                                                      161,138                                18,062(1)                             179,200
                  Gross profit                                                                                                        163,700                               (18,062)                               145,638
            Operating expenses:
                  Sales and marketing                                                                                                  57,343                                   —                                   57,343
                  Product development                                                                                                  20,549                                   —                                   20,549
                  General and administrative                                                                                           23,681                                 7,086(2)                              30,767
                  Amortization of acquired intangible assets                                                                           31,147                                26,006(3)                              57,153
                         Total operating expenses                                                                                     132,720                                33,092                                165,812
            Income/(loss) from operations                                                                                              30,980                               (51,154)                               (20,174)
            Interest income and other (expense), net                                                                                   (6,119)                                  —                                   (6,119)
            Interest expense                                                                                                              —                                 (44,527)(4)                            (44,527)
            Income/(loss) before income taxes                                                                                          24,861                               (95,681)                               (70,820)
            Income tax (benefit)/expense                                                                                                2,327                               (26,707)(5)                            (24,380)
            Net income/(loss)                                                                                                $         22,534                     $         (68,974)                      $        (46,440)
            Basic and diluted net loss per share (Class A through J):                                                                                                                                     $         (4.93)
            Weighted number of shares, basic and diluted (Class A through J):                                                                                                                                   9,414,600
            (1)   Reflects a net increase in cost of net revenues relating to the amortization of developed technology intangible assets acquired in connection with the Skype Acquisition. Acquired developed technologies
                  have useful lives ranging from three to seven years and are amortized on a straight-line basis.
            (2)   Reflects the addition of $7.1 million relating to monitoring fees that are payable under management service agreements entered into with certain of our shareholders in connection with the Skype
                  Acquisition. See “Certain Relationships and Related Party Transactions—Management Service Agreements.”
            (3)   Reflects a net increase in the amortization of acquired intangible assets expenses including customer lists and user base (two to three-year useful life), trademarks and trade names (ten year useful life)
                  and other intangible assets acquired in connection with the Skype Acquisition. Each of these intangible assets is amortized over its estimated useful life on a straight-line basis.
            (4)   Reflects an increase in interest expense of $44.5 million consisting of additional interest expense of $38.9 million on the Five Year Credit Agreement and payment-in-kind loan agreement with eBay
                  entered into in connection with the Skype Acquisition, and $5.6 million relating to amortization of the original issuance discount and deferred financing costs associated with the Five Year Credit
                  Agreement.
            (5)   Reflects the income tax effect of the pro forma adjustments at the statutory tax rate in effect in the jurisdiction to which the underlying pro forma adjustment related.

                                                                                                                    85




93 of 341                                                                                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                                                            MANAGEMENT’S DISCUSSION AND ANALYSIS
                                                      OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                  This management’s discussion and analysis of financial condition and results of operations should be read together with the consolidated
            financial statements and related notes that are included elsewhere in this prospectus. This discussion may contain forward-looking statements based
            upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-
            looking statements as a result of various factors, including those set forth under “Risk Factors” or elsewhere in this prospectus. See “Risk Factors”
            and “Forward-Looking Statements” for a discussion of some of the uncertainties, risks and assumptions associated with those forward-looking
            statements.

            Overview
                  Skype is a global technology leader that enables real-time communications over the Internet. Our software-based communications platform offers
            high quality, easy-to-use tools for Skype consumers and businesses to communicate and collaborate globally through voice, video and text conversations.

                  We believe the growth and scale of our user base are primary drivers of our business. Our user base has grown rapidly since we were founded in
            2003. From the three months ended June 30, 2009 to the three months ended June 30, 2010, we grew our average monthly connected users by 36% from
            91 million to 124 million. Our user base is geographically and demographically diverse, and our software is used by people throughout the world. For
            example, for the second quarter of June 2010, users registered in the United States represented approximately 16% of our total connected users; no other
            single country represented more than 7% of our connected users. We believe that our software has broad appeal and is actively used by people across
            gender, age and income groups.

                  The growth in our user base has translated into revenue growth. Our net revenues have historically been driven by the increasing use of our SkypeOut
            product, which enables Skype users to make low-priced calls to landlines and mobile devices on a pay-per-minute or subscription basis. Users of our paid
            communications services products, including SkypeOut, pay us in advance of their use of our products, and the growing popularity of our
            subscription-based products is providing us with more predictability of our future revenues.

                  Our primary costs associated with our net revenues are costs incurred by us to have SkypeOut calls connected, or “terminated,” on a landline or
            wireless network. As we have grown our business and entered into agreements with more telecommunications carriers to connect SkypeOut calls, we have
            been able to negotiate lower termination costs. As a result, cost of net revenues relating to our SkypeOut product have been increasing at a slower rate than
            our net revenues from the product, enabling us to improve our gross margin.

                   We believe our business is also characterized by low operating expenditures. In particular, our business and user communities benefit from network
            effects, whereby Skype products become more valuable as more people use them, thereby creating an incentive for current users to encourage new users to
            join. As more users join and attract others, Skype creates more value for users, thereby increasing engagement. The positive network effects have helped us
            grow our user base and establish Skype as a well-recognized brand in Internet communication, without requiring us to make significant investments in sales
            and marketing activities.

                   Our relatively low capital expenditures are primarily due to the “peer-to-peer” architecture that enables our software platform and leverages the
            network resources of our users to connect them. This architecture provides us with a significant cost advantage because we are not required to build or
            maintain a physical communications network, such as a wire or fiber optic network or cellular infrastructure. As a result, we can add new users and
            provide them with a wide range of products at minimal incremental cost to us, allowing us to offer many of our products for free. Furthermore, we have
            relatively low cash tax expense, expressed as a percentage of our income or loss before income taxes.

                                                                                         86




94 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

                   Our financial structure has allowed us to generate cash from operating activities that we are reinvesting in our business. We are continuing to invest
            in our core products, such as SkypeOut, because we believe that there is significant growth potential for these businesses. For example, we estimate that
            average monthly paying users of our communications services products represented less than 7% of our average monthly connected users for the three
            months ended June 30, 2010, indicating that we have potential to continue to grow our paying user base substantially and attract new users of our existing
            products. Further, we believe that our connected users represent less than 9% of global Internet users as of June 30, 2010. In addition, we have invested
            and are continuing to invest in improving and diversifying our portfolio of products with the objective of extending the use of Skype into new markets, in
            particular the enterprise market through our Skype for Business products, and across multiple communications platforms and devices. As described in more
            detail in “Business,” our current major initiatives to broaden and diversify our revenue streams include continuing to grow our user base, increasing Skype
            free and paid usage, extending our relationship with our users, developing new monetization models, and growing our user base through Skype for
            Business.

            Skype Acquisition
                  On November 19, 2009, Skype Global acquired the Communications business segment of eBay for consideration valued at $2.7 billion. The Skype
            Acquisition was accounted for as a business combination using the acquisition method. Assets acquired and liabilities assumed were recorded at their
            estimated fair values as of the acquisition date. The excess of purchase price over the tangible assets, identifiable intangible assets and assumed liabilities
            was recorded as goodwill in the amount of $2.4 billion. Among other things, the purchase accounting adjustments established increased bases of intangible
            assets for our customer lists and user base, trademarks and trade names and developed technology. In order to fund the Skype Acquisition in part we
            incurred long-term indebtedness with an outstanding balance of $807.2 million as of December 31, 2009. We refinanced this debt in February 2010, with
            aggregate borrowing of $727.9 million outstanding on June 30, 2010 and from operating cash. As a result of the Skype Acquisition and related borrowings,
            interest expense and non-cash amortization of acquired intangible assets charges have significantly increased.

            Presentation of Financial Information
                   For details of our presentation of financial information throughout this prospectus of financial information and, in particular, how we account for the
            Skype Acquisition, see “Selected Financial Data.” In our management’s discussion and analysis, we refer to all periods prior to November 19, 2009, the
            date of the Skype Acquisition, as “Predecessor” periods, and all periods from such date as “Successor” periods. For presentation purposes, we refer in
            this prospectus to the Predecessor’s combined financial statements and the Successor’s consolidated financial statements collectively as our “consolidated
            financial statements.” Furthermore, we have supplementally provided our consolidated net revenues, costs and expenses for the six months ended June 30,
            2009 and the year ended December 31, 2009 on a pro forma basis, as if the Skype Acquisition had taken place on January 1, 2009. This pro forma
            statement of operations information excludes certain non-recurring charges associated with the Skype Acquisition. The pro forma adjustments applied to
            the historical amounts discussed below are the same as those presented in our “Unaudited Pro Forma Condensed Consolidated Financial Information” and
            the notes thereto included elsewhere in this prospectus.

            Key Factors Affecting Results of Operations
                   Net Revenues. Our revenues are driven mainly by growth in the number of our connected users and by their use of our paid products. We generate
            revenues primarily from the sale of our paid Internet communications services products. Our SkypeOut product, which has historically generated a
            substantial majority of our net revenues, enables Skype users to make low-priced voice calls using our Skype software client to traditional fixed line or
            mobile networks. Other communications services products include SkypeIn, which allows our users to receive incoming calls using our Skype software
            client from traditional fixed lines or mobile networks, voicemail, SMS, and Skype Access, which allows our users to connect to compatible WiFi
            networks through our

                                                                                          87




95 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            Skype software client. These products are collectively referred to as our communications services products. The portion of our net revenues derived from
            the sale of our communications services products was 96%, 95% and 93% for 2007, 2008 and pro forma 2009, and 92% and 94% for the six months ended
            June 30, 2009 and 2010, respectively. The portion of our net revenues attributable to our SkypeOut product represented 88%, 87% and 86% for 2007,
            2008 and pro forma 2009, respectively and 87% for both the six months ended June 30, 2009 and 2010. We license our software application and provide
            software updates free of charge to our users. Accordingly, we do not derive revenue from the licensing of these software products to users.

                  Our fees for communications services are primarily charged on a per-minute or subscription basis. Customers of our communications services pay us
            in advance of using our products. As a result, we record those advance payments as deferred revenue and user advances until we recognize them as
            revenue when our customers use our products. Our SkypeOut subscription products are a more recent addition to our products than pay-as-you-go, or
            “PAYG,” and their popularity has increased. The portion of our net revenues attributable to subscription products was 7%, 10% and 16% for 2007, 2008
            and pro forma 2009 and 15% and 14% for the six months ended June 30, 2009 and 2010, respectively. We expect this trend to continue as our user base
            grows and as our PAYG customers increasingly purchase our subscription products.

                  Only a small percentage of our connected users have historically paid to use our products. For example, in the three months ended June 30, 2010, we
            generated communications services revenues from approximately 7% of 124 million connected users (which represents a monthly average of connected
            users during the three month period), illustrating that substantially all of our revenues come from a small portion of our user base. While we are actively
            seeking to expand the user base that utilize our portfolio of products and to broaden and diversify our product offerings, we expect a high percentage of our
            revenues to continue in the foreseeable future to be derived from a small percentage of our overall connected users.

                  Historically, a substantial majority of our revenue has come from our consumer users. As we seek to develop new communications services products
            and expand our Skype for Business offerings, we expect our net revenues attributable to our consumer users to decrease as a percentage of total net
            revenues and our revenues from business users to increase both in absolute terms and as a percentage of total net revenues. In addition, as we seek to
            implement our strategy of expanding the use of Skype products across a broader spectrum of platforms, such as mobile devices, television and websites,
            we expect that our net revenues will, over time, be derived less from desktop users of Skype than has historically been the case.

                  In addition to our communications services products, we also generate net revenue to a much lesser extent from marketing and other services which
            allow businesses to leverage our user base to market their products, as well as other licensing arrangements. We expect net revenues from marketing and
            other services to grow as a percentage of net revenues over time.

                   Cost of net revenues and gross margin. Amortization of acquired intangibles expense is the most significant indirect cost of net revenues. Since the
            Skype Acquisition, our cost of net revenues has been adversely impacted as a result of an increase in basis of developed technology intangible assets
            acquired therein. The net amount of acquired intangibles was $712.9 million as of June 30, 2010, as compared to $112.9 million as of December 31, 2008.
            In the Predecessor period from January 1, 2009 to November 18, 2009, our cost of net revenues represented 47% of net revenues, compared to 49% during
            the Successor period from November 19, 2009 to December 31, 2009, which increase was primarily the result of the purchase accounting adjustments
            made in connection with the Skype Acquisition, as described above under “—Skype Acquisition.” This increased amortization is expected to have a
            negative impact on our results of operations for the foreseeable future.

                  The most significant direct cost of net revenues are termination costs, which are fees paid to telecommunications carriers to connect, or “terminate,”
            SkypeOut calls to landline and wireless networks. The portion of our cost of net revenues attributable to termination costs was 69%, 72% and 65% for
            2007, 2008 and pro forma 2009, and 64% and 66% for the six months ended June 30, 2009 and 2010, respectively. Other costs of

                                                                                         88




96 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            net revenues consist of payment processing fees, site operations and customer support. Payment processing fees are paid to third parties to process and
            collect payments from our users. Our site operations costs include the costs to support our website and network infrastructure. Our customer support
            function assists our users with queries about our products. We have increased our investment in our customer support function in recent periods to focus on
            improving the quality and timeliness of our responses to our users seeking assistance.

                  Compared to our communications services products, cost of net revenues relating to our marketing services are relatively low. For example, we
            incur minimal costs to allow for third-party software downloads to occur at the same time users download the Skype software client.

                  We recorded gross margin, which we define as the difference between our net revenues and our cost of net revenues, expressed as a percentage of
            net revenue, of 40%, 47% and 48% for 2007, 2008 and pro forma 2009, and 50% and 51% for the six months ended June 30, 2009 and 2010, respectively.
            The period-over-period improvements have primarily been driven by reductions in termination costs as a result of the cost advantages associated with
            expanding our network of providers of termination minutes and the diversification of our revenue streams, particularly through marketing services,
            including sponsored downloads and other licensing arrangements. In addition, our gross margin was positively affected by price actions that we took in
            January 2007 and September 2009. In the pro forma 2009 period and the six month period ended June 30, 2010, the positive trends in gross margin were
            partially offset by the negative impact of increased amortization expense as a result of the acquired developed technology assets made in connection with
            the Skype Acquisition.

                  We expect our gross margin to be relatively stable in the foreseeable future. We may experience modest improvement as we seek to diversify and
            expand our revenue sources, including marketing and other services, which have lower associated costs, while continuing to seek to negotiate reductions in
            termination costs. However, we expect our gross margins to continue to be negatively affected by the increased amortization expense of developed
            technology intangible assets, the shift from pay-as-you-go to subscription products and our continued investment in our infrastructure and customer support
            functions. In addition, our gross margin may be affected, either positively or negatively, by a broad range of other factors and events. As a result, we cannot
            assure you that our future gross margin will be stable or that it will not decline.

                  Operating expenses. Our operating expenses consist of sales and marketing expenses, product development expenses, general and administrative
            expenses (including transaction costs associated with the Skype Acquisition), the Joltid litigation settlement, impairment of goodwill and amortization of
            intangible assets. We discuss below our primary operating expenses.

                   Sales and marketing. Sales and marketing expenses consist primarily of advertising, marketing and public relations programs as well as employee
            compensation for staff focused on sales and marketing activities. We direct customers to our website primarily through a number of online marketing
            channels such as sponsored search, portal advertising, email campaigns and other initiatives. We have the ability to vary our marketing expenses based on
            growth in revenue and in light of changes in advertising rates. We expect sales and marketing expenses to increase in aggregate amount in future periods as
            we increase our sales and marketing activities to support and promote our growing portfolio of product offerings, including marketing and distribution
            costs relating to our Skype for Business products, as well as the Skype brand more generally. We expect our sales and marketing expenses to fluctuate in
            future periods, both in aggregate and as a percentage of net revenues.

                  Product development. Product development expenses consist primarily of employee compensation costs and third-party developer costs that are
            incurred in connection with the enhancement of the existing Skype software and the development of new products. The costs for research, including
            predevelopment efforts prior to establishing technological feasibility of new software, and development of new products enabled by our software, are
            expensed as incurred. In addition, we have benefited historically from relatively low employee costs related to product development compared to many of
            our competitors, as the majority of our engineers and developers have been based in Tallinn, Estonia. We have recently begun to expand our product
            development employee base in jurisdictions with higher labor and real estate costs, for example with the planned expansion of

                                                                                          89




97 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            our Silicon Valley office which will focus on developing Skype products for multiple platforms, which are expected to result in relatively higher product
            development costs. As a result, we expect product development expenses to continue to increase both in absolute terms and as a percentage of net revenues
            in future periods as we continue to invest in and expand our portfolio of products, such as our Skype for Business products and products that are designed
            for platforms other than desktops, such as mobile devices, televisions and the Internet.

                  General and administrative. General and administrative expenses consist primarily of employee compensation, legal costs and professional fees,
            transaction costs directly associated with the Skype Acquisition and corporate allocations. Our legal-related costs are mainly incurred in connection with
            various ongoing litigations and can fluctuate from period to period.

                 The consummation of this offering will trigger payments in the aggregate amount of $    to affiliates of Silver Lake, eBay, the CPP Investment
            Board Private Holdings Inc., Andreessen Horowitz and Joltid under management services agreements, which become payable at the time of this offering.
            For more information, see “Certain Relationships and Related Party Transactions.”

                  As we become a public company and complete our transition to a stand-alone company, we expect to incur additional operating expenses which
            could be substantial as a percentage of our revenue, including investor relations, insurance, shareholder administration and regulatory compliance costs, to
            comply with our obligations under the Sarbanes-Oxley Act and other applicable laws and regulations.

                   In the short term, we expect general and administrative expenses to increase both in absolute amounts and as a percentage of net revenues as a result
            of the costs associated with becoming a public company, but in the long-term we expect them to remain stable or decrease as a percentage of net revenues.

                   Litigation settlement. Prior to the closing of the Skype Acquisition, we and eBay reached a settlement with Joltid regarding our use of technology
            that facilitates communications in the peer-to-peer network of Skype users. In connection with the settlement, we acquired ownership of the intellectual
            property rights in the software and related technology known as the “Global Index.” As part of the settlement, Joltid received an approximate 10% share in
            our share capital, valued at the time at $224.0 million, a cash payment of $85.0 million, and a warrant to purchase an additional 98,680 of our shares
            valued at $17.2 million, equivalent to a 1% equity stake at such time, exercisable until the earlier of November 19, 2019 or the occurrence of a
            reorganization event, as defined in the warrant. The warrant has since been transferred to SEP Investments Pty Limited, an entity unaffiliated with Joltid;
            for more information on the terms of the warrant, see “Capitalization—Warrants.” Joltid also made an investment in us by investing $80.0 million in the
            Company in consideration for an additional approximate 3.4% share in the equity of the Company at such time. In addition, we made payments or
            commitments to invest an additional $32.3 million to certain affiliated parties of Joltid and reimbursed $20.0 million in legal expenses incurred by Joltid.
            The aggregate settlement of $378.4 million resulted in a net charge of $343.8 million recorded in the statement of operations for the Predecessor period
            from January 1, 2009 to November 18, 2009 and reflects the estimated fair value of the net cash and equity relinquished in the settlement less the estimated
            fair value of intellectual property acquired from Joltid.

                  In this prospectus, we refer to the settlement with Joltid, our acquisition of the Global Index technology and Joltid’s investment in us collectively as
            the “Joltid Transaction.” For more information on the Joltid Transaction, see “Certain Relationships and Related Party Transactions—Acquisition-Related
            Matters—The Joltid Transaction.”

                  Goodwill and Other Intangible Assets. We carry significant goodwill and intangible asset balances in our statement of financial position that arose
            upon the Skype Acquisition. The goodwill presented in the Successor period arose upon the establishment of a new basis of accounting in connection with
            the Skype Acquisition and replaced the goodwill balance presented in the Predecessor period, which arose upon the acquisition by eBay in 2005.
            Goodwill is tested annually for impairment or on an interim basis if events and circumstances indicate that

                                                                                          90




98 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




            Table of Contents

            goodwill may be impaired and requires estimates of future operating results and operating cash flows. The estimates are derived from our long-term
            financial outlook; however, due to the early-stage nature of the business and our developing revenue model, there is an increased risk of differences
            between projected and actual performance that could impact future estimates of the fair value of the Company. The total goodwill balance as of June 30,
            2010 was $2.4 billion. This amount, recognized at the time of the Skype Acquisition, represents the excess of purchase price over the tangible assets,
            identifiable intangible assets and assumed liabilities acquired in the Skype Acquisition. We expect to conduct our annual test of impairment during the
            second half of 2010. Events or changes in circumstances may indicate that the carrying amount of the goodwill balance is not recoverable, resulting in an
            impairment charge in the future. In 2007, we recorded a charge of $1.4 billion impairment of the goodwill originally recognized upon our acquisition by
            eBay in 2005. The impairment charge was determined by comparing the carrying value of goodwill in eBay’s Communications reporting unit with the
            implied fair value of the goodwill, based on the estimation of future operating results and cash flows discounted using an estimated discount rate.

                  Other identifiable intangible assets in the amount of $788.1 million as of December 31, 2009 and $712.9 million as of June 30, 2010 consist of
            assets acquired in connection with the Skype Acquisition, including acquired customer lists and user base, trademarks and trade names, and developed
            technologies and are being amortized over the shorter of the contractual life or the estimated useful life ranging from two to ten years.

                  Interest income and other (expense), net. Interest income and other (expense), net, consists of interest earned on cash, cash equivalents and
            investments, as well as foreign exchange transaction gains and losses and other miscellaneous transactions not related to our primary operations, such as
            expenses or income associated with our minority equity investments and at-cost investments. Interest expense incurred on our long-term debt is included
            separately in our results of operations under “—Interest expense,” below.

                  Interest expense. Our interest expense comprises the expense incurred on our long-term debt. On November 19, 2009, we incurred $806.7 million
            of indebtedness to finance the Skype Acquisition, of which $681.7 million was attributable to the Five Year Credit Agreement and $125.0 million was a
            payment-in-kind loan agreement with eBay, each of which is described under “—Liquidity and Capital Resources—Indebtedness.” We refinanced this
            long-term debt in February 2010, increasing the term loan borrowings and repaying the full amount of the payment-in-kind loan (including accumulated and
            unpaid interest) from the increased principal amount and from operating cash. As of June 30, 2010, $727.9 million was outstanding under our Amended
            Five Year Credit Agreement, as amended. We have the option to prepay the Amended Five Year Credit Agreement at any time, and we are required to
            prepay it from excess cash flow when certain financial tests are met. For further details, see “—Liquidity and Capital Resources—Indebtedness.”

                   Income tax. Skype is a global business that operates across multiple taxing jurisdictions. Our favorable geographic mix of income contributes to
            lowering our overall tax expense. In particular, while our income is generated predominantly by our Luxembourg operating company, our tax expense is
            significantly lower than the amount computed by applying the Luxembourg statutory tax rate to pre-tax U.S. GAAP income because our taxable income is
            reduced as a consequence of, among other items, our intercompany licenses of intellectual property and historic net operating losses in Luxembourg. Our
            cash outflows relating to our taxes for the pro forma year ended December 31, 2009 consisted primarily of foreign withholding tax of $2.6 million.

                   However, the effects described above are partially offset by expenses for which we cannot recognize a current deduction for tax purposes.
            Furthermore, we have taxable income in some countries and losses in others (in part as a result of our intercompany licensing transactions). Losses in one
            country cannot be used to offset income in other countries. Additionally, we do not recognize tax benefits of losses, if we believe it is more likely than not
            that such losses will not be utilized. These factors have contributed to fluctuations in our historical tax expense from period to period. We expect our tax
            expense will continue to fluctuate from period to period.

                                                                                          91




99 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                At December 31, 2009, we had net operating loss carryforwards of $2.0 billion, of which $1.8 billion related to our Luxembourg operations and
         $0.2 billion related to our Irish operations. Our ability to utilize net operating loss carryforwards is influenced by a number of factors, including
         insufficient future taxable income and changes in our ownership.

                At December 31, 2009, we had a valuation allowance of $501.4 million against our deferred tax assets including those relating to net operating loss
         carryforwards relating to our Luxembourg and Irish operations. We currently to not expect to utilize the net operating loss carryforwards related to our
         Irish operations because it does not generate operating income.

                Tax benefits or charges associated with movements in valuation allowances are generally reflected in our results of operations except for those
         relating to equity transactions which are reflected in our stockholder equity.

               Tax authorities in various countries examine our tax return from time to time. We provide tax reserves for uncertainties associated with our tax
         benefits/(expense). We had tax reserves of $2.2 million as of December 31, 2009.

               We believe that, for the foreseeable future, cash required for the payment of income taxes is expected to be less than 10% of our pre-tax income.

                The determination of taxable income in any jurisdiction is dependent, among other factors, upon the acceptance of our operational and intercompany
         transfer pricing practices by taxing authorities as being on an arm’s length basis. Due to inconsistencies in the application of this standard among taxing
         authorities, as well as the possibility that double tax treaty relief may be unavailable, transfer pricing challenges by taxing authorities could, if successful,
         substantially increase our reported income tax expense.

         Effect of this Offering on Compensatory Stock Options
               Under the Skype Equity Incentive Plan, certain performance-based stock options for our ordinary shares vest based upon the achievement of return
         thresholds in a liquidity event such as the completion of this offering. Since the occurrence of a liquidity event that will trigger the eligibility of vesting for
         performance-based stock options is outside of the control of the Company or the optionholders, compensation expense related to performance-based stock
         options will be recognized only when a liquidity event occurs based on the number of shares that become eligible for vesting. As of June 30, 2010, there
         was $27.1 million of unearned stock-based compensation, net of estimated forfeitures, relating to performance based stock options awards made to our
         employees, directors, service providers and consultants under the Skype Equity Incentive Plan that we estimate will be recognized as an expense in our
         statement of operations in connection with or subsequent to the consummation of this offering. For a discussion of the Skype Equity Incentive Plan, see
         “Executive Compensation—Compensation Discussion & Analysis–Components of Executive Compensation—Long-Term Equity Incentives.”

         Key Metrics
                We monitor certain key operating metrics that we believe drive our financial performance, including net revenues, and that we use to measure usage
         during different periods of the year to manage our business and to help identify potential fraudulent activities. These metrics are derived from our
         operational systems, as opposed to our financial reporting systems. As our business evolves and we continue to gain further insight into our growing
         business, we may change the method of calculating our key operating metrics, enhance our operational systems to address uncertainties in these metrics or
         add new key operating metrics to reflect the changes in our business. For more information about the methodology of determination of our metrics, and the
         limitations thereon, see “Selected Financial Data—Key Metrics.”

                                                                                         92




100 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                  http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

              The table below shows our registered users as of the relevant dates specified below as well as the average monthly connected users and average
         monthly paying users for the three months ended on the relevant dates specified below:

                                                                                                                                   As of or for the three months ended, as applicable,
                                                                                                         December 31,            December 31,          December 31,                    June 30,                June 30,
                                                                                                            2007                    2008                    2009                         2009                    2010
                                                                                                                                                         (millions)
         Registered users(1)                                                                                        217                     325                      474                         397                560
         Average monthly connected users(2)                                                                           52                     75                      105                          91                124
         Average monthly paying users                                                                                4.6                     5.8                      7.3                        6.6                 8.1
         (1)   Our registered users as of December 31, 2007, 2008 and 2009 include 3 million, 17 million and 20 million, and as of June 30, 2009 and 2010 include 19 million and 20 million users, respectively, who
               registered through their MySpace account. We believe MySpace registered users are infrequent users of Skype products. We have notified MySpace that we do not intend to renew the contract, through
               which users can register through MySpace, when it expires on November 27, 2010. The registered user numbers in the table above exclude users that have registered on Skype through our Chinese
               investment, Tel-Online Limited; the number of users that registered through Tel-Online Limited amounted to 59 million, 80 million and 86 million as of December 31, 2007, 2008 and 2009, respectively, and
               83 million and 88 million users as of June 30, 2009 and 2010, respectively.
         (2)   Our average monthly connected users for the three months ended December 31, 2007, 2008 and 2009 include 1 million, 4 million and 2 million, and for the three months ended June 30, 2009 and 2010
               include 3 million and 1 million users, respectively, who registered through their MySpace account. We believe MySpace connected users are infrequent users of Skype products. We have notified
               MySpace that we do not intend to renew the contract, through which users can register and connect through MySpace, when it expires on November 27, 2010. The average monthly connected user
               numbers in the table above exclude users that have connected to Skype through our Chinese investment, Tel-Online Limited; the average monthly connected users that connected through Tel-Online
               Limited amounted to 4 million, 3 million and 2 million for the three months ended December 31, 2007, 2008 and 2009, respectively, and 2 million users for both the three months ended June 30, 2009 and
               2010.

                 The table below shows average communications services revenue per paying user, on an annualized basis for each of the periods presented:

                                                                                                                                                                                     ANNUALIZED, based on data
                                                                                                                                For the year ended                                     for the six months ended
                                                                                                                                  December 31,                                                  June 30,
                                                                                                                      2007             2008               2009                           2009                  2010
                                                                                                                                                            (U.S. dollars)
         Average communications services revenue per paying user                                                     $ 81             $ 102           $      98                     $           94         $          96

                The table below shows our communications services billing minutes and Skype-to-Skype minutes for each of the periods presented:
                                                                                                                                For the year ended
                                                                                                                                  December 31,                                           For the six months ended,
                                                                                                                                                                                        June 30,            June 30,
                                                                                                                      2007             2008               2009                           2009                 2010
                                                                                                                                                             (billions)
         Communications services billing minutes                                                                       4.1              6.9              10.7                                5.0                    6.4
         Skype-to-Skype Minutes                                                                                       43.4             65.5             113.0                               49.1                   88.4

         Results of Operations
         Summary results of operations for the Successor six months ended June 30, 2010, Predecessor and Pro Forma six months ended June 30, 2009,
         Successor 2009, Predecessor 2009, Pro Forma 2009, and Predecessor 2008 and 2007
                The Successor period for November 19, 2009 to December 31, 2009 and all following periods include the effect of the purchase price related to the
         Skype Acquisition being allocated to assets and liabilities based on their estimated fair value on November 18, 2009. The excess of purchase price over
         the tangible assets, identifiable

                                                                                                               93




101 of 341                                                                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         intangible assets and assumed liabilities was recorded as goodwill. See Note 3 to our audited consolidated financial statements included elsewhere in this
         prospectus for more information. As a result, the consolidated financial statements for the Successor period are not directly comparable to those of any
         prior period.

               For purposes of the discussion that follows, we have supplementally provided our consolidated net revenues, costs and expenses for the year ended
         December 31, 2009 and the six months ended June 30, 2009 on a pro forma basis, as if the Skype Acquisition had taken place on January 1, 2009. Our pro
         forma information gives effect to the Skype Acquisition as if it had occurred on January 1, 2009 and excludes certain non-recurring charges associated with
         the Skype Acquisition. For more information, see “Unaudited Pro Forma Condensed Consolidated Financial Information” and the related notes included
         elsewhere in this prospectus. The pro forma adjustments are the same as those described under “Unaudited Pro Forma Condensed Consolidated Financial
         Information” and have been applied based upon the requirements of Article 11 of Regulation S-X.

              The following table sets forth our consolidated results of operations for the Predecessor period from January 1, 2009 to November 18, 2009, the
         Successor period from November 19, 2009 to December 31, 2009 and the pro forma year ended December 31, 2009.

                                                                                                        Predecessor               Successor              Pro forma
                                                                                                         Period from             Period from
                                                                                                          January 1,             November
                                                                                                           2009 to               19, 2009 to             Year ended
                                                                                                        November 18,            December 31,            December 31,
                                                                                                            2009                    2009                    2009
                                                                                                                          (thousands of U.S. dollars)
         Net revenues                                                                                   $ 626,458               $     92,445            $ 718,903
         Cost of net revenues                                                                             293,533                     44,836              370,295
               Gross profit                                                                               332,925                     47,609              348,608
         Operating expenses:
               Sales and marketing                                                                         111,029                  17,267                 126,096
               Product development                                                                          34,993                   5,809                  40,802
               General and administrative                                                                   50,208                 113,284                  75,821
               Amortization of acquired intangible assets                                                   55,453                  13,284                 114,307
               Litigation settlement                                                                       343,826                     —                   343,826
               Impairment of goodwill                                                                          —                       —                       —
                      Total operating expenses                                                             595,509                 149,644                 700,852
         (Loss)/income from operations                                                                    (262,584)               (102,035)               (352,244)
         Interest income and other (expense), net                                                           (2,549)                  5,492                   2,943
         Interest expense                                                                                      —                   (10,387)                (89,644)
         (Loss)/income before income taxes                                                                (265,133)               (106,930)               (438,945)
         Income tax (benefit)/expense                                                                        3,950                  (7,209)                (21,398)
         Net (loss)/income                                                                              $ (269,083)             $ (99,721)              $ (417,547)

                                                                                     94




102 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                      http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

              The following table sets forth our comparative statements of operations for the Predecessor years 2007 and 2008 and for the year ended
         December 31, 2009 on a pro forma basis, as well as for the six months ended June 30, 2009 (Predecessor and pro forma) and June 30, 2010 (Successor):

                                                                                                                                      Six months ended
                                                                                     Year ended December 31,                               June 30,
                                                                            Predecessor     Predecessor         Pro forma        Predecessor        Pro forma   Successor
                                                                               2007            2008                2009             2009              2009        2010
                                                                                      (thousands of U.S. dollars, except percentages)
         Net revenues                                                      $   381,551      $ 551,364         $ 718,903         $ 324,838         $324,838      $406,170
         Cost of net revenues                                                  228,638        290,053           370,295           161,138          179,200       199,820
               Gross profit                                                    152,913        261,311           348,608           163,700          145,638       206,350
         Operating expenses:
               Sales and marketing                                              67,195          85,630          126,096           57,343             57,343       70,998
               Product development                                              22,078          31,124           40,802           20,549             20,549       29,950
               General and administrative                                       41,169          51,863           75,821           23,681             30,767       46,824
               Amortization of acquired intangible assets                       65,514          69,832          114,307           31,147             57,153       57,154
               Litigation settlement                                               —               —            343,826              —                  —            —
               Impairment of goodwill                                        1,390,938             —                —                —                  —            —
                      Total operating expenses                               1,586,894         238,449          700,852          132,720           165,812       204,926
         (Loss)/income from operations                                      (1,433,981)         22,862         (352,244)          30,980            (20,174)       1,424
         Realized loss on amended credit agreement                                 —               —                —                —                  —        (13,513)
         Interest income and other (expense), net                                5,303          10,297            2,943           (6,119)            (6,119)      31,330
         Interest expense                                                          —               —            (89,644)             —              (44,527)     (35,606)
         (Loss)/income before income taxes                                  (1,428,678)         33,159         (438,945)          24,861            (70,820)     (16,365)
         Income tax (benefit) expense                                          (23,342)         (8,447)         (21,398)           2,327            (17,938)     (29,486)
         Net (loss)/income                                                 $(1,405,336) $       41,606        $(417,547)        $ 22,534          $ (52,882)    $ 13,121

                                                                                   95




103 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Net Revenues
                The following table sets forth, for the periods presented, the breakdown of net revenues by type and geography. Revenues earned from our
         communications services are attributed to the relevant country based upon the user’s IP address location at the time of registration with Skype (as opposed
         to the location of the user or the user’s IP address at the time of the utilization of Skype). Users that registered in the United States are the only group that
         contribute more than 10% of our net revenues in any of the periods presented. Our non-United States revenues are primarily generated in Europe. Revenues
         earned from other products and services are attributed to the domicile of our contracting entity.

                                                              Year ended December 31,               Predecessor        Successor              Six months ended June 30,
                                                                                            Pro        Jan. 1 -        Nov. 19 -
                                                       Predecessor Predecessor            forma        Nov. 18,         Dec. 31,          Predecessor          Successor
                                                          2007        2008                 2009          2009            2009                2009                2010
                                                                                           (thousands of U.S. dollars)
         Net Revenues by Type:
         Communications services                       $       365,533 $       526,341    $665,457    $       575,939    $     89,517     $         299,528   $     380,656
         Marketing and other services                           16,018          25,023      53,446             50,519           2,928                25,310          25,514
                Total net revenues                     $       381,551 $       551,364    $718,903    $       626,458    $     92,445     $         324,838   $     406,170
         Net Revenues by Geography:
         U.S.                                          $        55,016 $        89,395    $116,872    $       101,850          15,022     $          53,728   $      67,816
         Non-U.S.                                              326,535         461,969     602,031            524,608          77,423               271,110         338,354
               Total net revenues                      $       381,551 $       551,364    $718,903    $       626,548    $     92,445     $         324,838   $     406,170


             Comparison of the six months ended June 30, 2010 and 2009
                Net revenues during the six months ended June 30, 2010 increased by $81.4 million or 25%, to $406.2 million compared to $324.8 million during
         the same period in the previous year. The increase in net revenues was due primarily to a 27% period over period increase in total communications
         services billing minutes. The increase in billing minutes between periods was due primarily to the 23% increase in the monthly average number of paying
         users to approximately 8.1 million for the second quarter of 2010 as compared to the same period in 2009, as well as an increase in the popularity of
         Internet calling subscription products, which allow our users to make either a pre-determined or unlimited (subject to fair use policy) volume of Internet
         calls for one, three or twelve-month periods. Our users who purchase subscription-based communications services generally consume on average more
         billing minutes than users that only use the predominant pay-as-you-go product, which has contributed to the increase in billing minutes as the popularity of
         subscription-based Internet calling has grown. Revenue growth between periods was lower than the increase in billing minutes because we earned less
         revenue per billing minute under our subscription products. In addition, our net revenues in the six months ended June 30, 2010 were positively impacted
         by price actions that we took in September 2009. Net revenues attributed to the United States during the periods ended June 30, 2010 and June 30, 2009
         were 17% of our global net revenues during each of these periods. Net revenues earned from marketing and other services remained broadly flat in
         June 30, 2010 as compared to the same period in 2009. Pro forma net revenues for the six months ended June 30, 2009 were equal to Predecessor net
         revenues for the same period.

             Comparison of the years ended December 31, 2009 and 2008
                Net revenues for the Predecessor period from January 1, 2009 to November 18, 2009 were $626.5 million, and net revenues for the Successor
         period from November 19, 2009 to December 31, 2009 were $92.4 million. Pro forma net revenues for the year ended December 31, 2009 were equal to
         the arithmetic sum of the actual revenues for the Predecessor and Successor periods in 2009.

               Net revenues for the pro forma year ended December 31, 2009 increased by $167.5 million, or 30%, to $718.9 million compared to $551.4 million
         during the previous year. The increase in net revenue was due

                                                                                         96




104 of 341                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         primarily to our year-over-year increase in communications services billing minutes of 3.7 billion, a 54% increase from the same period in 2008, resulting
         in an increase in net revenues attributable to communications services of $139.1 million, or 26%, compared to 2008. The increase in billing minutes in
         2009 was due primarily to the 26% increase in the number of monthly average paying users to approximately 7.3 million at for the fourth quarter of 2009 as
         compared to the same period in 2008, as well as an increase in the popularity of Internet calling subscription products. The increase in net revenues was
         negatively impacted by foreign currency movements, due primarily to the euro weakening against the U.S. dollar. Revenue growth between periods was
         lower than the increase in billing minutes because we earned less revenue per billing minute under our subscription products. The increase in net revenues
         was partially offset by a $10.5 million decrease in the net revenues from products sold from the Skype store in pro forma 2009 as compared to 2008, due
         to a change in our business model in the first quarter of 2009 whereby the Skype store stopped selling products directly and instead started selling products
         only on an agency basis.

                We believe that the growth in connected users was due primarily to continued increased marketing initiatives, where we have experienced a
         continued uplift in exposure through the use of Skype on television programs, coupled with the increased popularity of our free video calling product, and
         the increased availability of our Skype software to users on a wider array of platforms, particularly mobile devices such as the iPhone. Net revenues
         attributed to the United States during the pro forma year ended December 31, 2009 and the year ended December 31, 2008 was 16% of our global net
         revenues during each of these periods.

               Marketing and other services revenue also increased during the pro forma year ended December 31, 2009, generating $53.4 million, compared to
         $25.0 million in 2008, due primarily to additional revenue earned from a third-party sponsored software download arrangement.

             Comparison of the years ended December 31, 2008 and 2007
                Net revenues during the year ended December 31, 2008 increased by $169.8 million, or 45%, to $551.4 million compared to $381.5 million during
         the previous year. The increase in net revenue was due primarily to our year-over-year increase in communications services billing minutes of 2.8 billion,
         a 69% increase from the same period in 2007, resulting in an increase in net revenues attributable to communications services of $160.8 million, or 44%,
         compared to 2007. The increase in billing minutes in 2008 was due primarily to the 26% increase in the number of average monthly paying users to
         approximately 5.8 million for the fourth quarter of 2008 as compared to the same period in 2007, as well as the expansion of our product offerings,
         including the launch of our subscription products during the second quarter of 2008. The increase in net revenues was positively impacted by foreign
         currency movements, due primarily to the euro strengthening against the U.S. dollar. Revenue growth between periods was lower than the increase in
         billing minutes because we earned less revenue per billing minute under our subscription products. We believe that the growth in connected users was due
         to the positive impact of network effects and increases in our marketing activities, particularly in the United States. Net revenues attributed to the United
         States during the period ended December 31, 2008 increased to 16% of our global net revenues for 2008 as compared to 14% of global net revenue in
         2007.

               Marketing and other services revenue also increased during the year ended December 31, 2008 due primarily to the introduction in 2008 of a
         third-party sponsored software download arrangement. Revenue earned from the direct sale of hardware devices from our online store was $13.2 million
         in 2008 prior to being discontinued in early 2009.

                                                                                      97




105 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Cost of Net Revenues
               The following table summarizes changes in cost of net revenues for the pro forma year ended December 31, 2009, the Predecessor years ended
         December 31, 2008 and 2007, and the Successor period from January 1, 2010 to June 30, 2010, as well as the pro forma period and the Predecessor
         period from January 1, 2009 to June 30, 2009. The table also provides the 2009 breakdown for the Predecessor period from January 1, 2009 to
         November 18, 2009 and the Successor period from November 19, 2009 to December 31, 2009:

                                                      Year ended December 31,                   Predecessor           Successor                   Six months ended June 30,
                                                                                   Pro            Jan. 1 -             Nov. 19 -                               Pro
                                             Predecessor     Predecessor         forma            Nov. 18,             Dec. 31,         Predecessor          forma          Successor
                                                2007            2008              2009              2009                 2009              2009               2009            2010
                                                                                         (thousands of U.S. dollars, except percentages)
         Cost of net revenues                $    228,638    $   290,053        $370,295        $    293,533          $ 44,836          $    161,138        $179,200        $ 199,820
         As a percentage of net revenues             59.9%          52.6%           51.5%                46.9%              48.5%               49.6%            55.2%           49.2%


             Comparison of the six months ended June 30, 2010 and 2009
              Cost of net revenues increased in the first half of 2010 by $38.7 million, or 24%, compared to our actual cost of net revenues in the first half of 2009,
         primarily due to an $18.1 million increase in cost of amortization of developed technologies acquired in the Skype Acquisition.

                In addition, cost of net revenues increased in the first half of 2010 by $20.6 million, or 12%, compared to our pro forma cost of net revenues in the
         first half of 2009, primarily as a result of an increase in termination costs of $16.1 million, or 14%, resulting from an increase in communications services
         billing minutes. Termination costs reflect amounts paid to procure termination minutes; therefore, as the number of billing minutes increases, termination
         costs increase as well. Customer support costs increased by $2.4 million, or 58%, compared to the first half of 2009, due to investment in our customer
         support focusing on improving the quality and timeliness of our responses to our users seeking assistance. Site operations costs increased by $5.1 million,
         or 49%, due to an increase in third-party computer server hosting costs as well as additional investments made in the infrastructure enabling our
         communications services.

             Comparison of the years ended December 31, 2009 and 2008
               Cost of net revenues for the Predecessor period from January 1, 2009 to November 18, 2009 was $293.5 million, and cost of net revenues for the
         Successor period from November 19, 2009 to December 31, 2009 was $44.8 million. The relative increase in cost of net revenues during the Successor
         period is primarily the result of an increase in amortization of developed technology intangible assets acquired in connection with the Skype Acquisition.
         Amortization of developed technology intangible assets gave rise to cost of net revenues expressed as a percentage of net revenue of 48.5% during the
         Successor period from November 19, 2009 to December 31, 2009 as compared to 46.9% for the Predecessor period from January 1, 2009 to
         November 18, 2009.

                Cost of net revenues increased by $80.2 million, or 28%, in the pro forma year ended December 31, 2009 compared to 2008, due in part to pro
         forma cost of net revenues increasing by $31.9 million to reflect the amortization of developed technologies acquired in the Skype Acquisition that would
         have been recorded had the Skype Acquisition occurred on January 1, 2009. The cost of net revenues was also higher, due in part to an increase in
         termination costs of $30.2 million, or 14%, resulting from an increase in billing minutes. The increase in termination costs of 14% is less than the increase
         in total billing minutes of 54% due to an overall reduction in call termination rates per minute combined with a higher portion of billing minutes being to
         landlines instead of mobiles in 2009 compared to 2008 as a result of the introduction of our SkypeOut subscription products. Payment processing fees
         increased by $5.8 million, or 22%, as a result of the increase in orders processed to deliver our communications services. Customer support costs
         increased by $5.5 million compared to 2008, due to investment in our customer support focusing on improving the quality and timeliness of our responses
         to our

                                                                                          98




106 of 341                                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         users seeking assistance. Site operations costs increased by $5.3 million, or 29%, due to an increase in third-party computer server hosting costs as well as
         additional investments made in the infrastructure enabling our communications services.

                The increase in cost of net revenues was partially offset by a $5.8 million decrease in the cost of products sold from the Skype store, due to a change
         in our business model in the first quarter of 2009 whereby the Skype store stopped selling products directly and instead started selling products only on an
         agency basis. Cost of net revenues decreased from 52.6% of net revenues to 51.5% of net revenues due primarily to an overall reduction in the price paid
         per termination minute, offset in part by the pro forma amortization costs.

             Comparison of the years ended December 31, 2008 and 2007
               Cost of net revenues increased by $61.4 million, or 27%, in 2008 compared to 2007, primarily due to an increase in termination costs of $51.7
         million, or 33%, due to an increase in communications services billing minutes. Customer support costs increased by $1.9 million due to investment in our
         customer support focusing on improving the quality and timeliness of our responses to our users seeking assistance. Site operations costs increased by $4.2
         million, or 29%, due predominantly to increases in the costs paid to third-party hosting providers. Cost of net revenues decreased from 59.9% of net
         revenues to 52.6% of net revenues due primarily to an overall reduction in the price paid per termination minute.

         Sales and marketing
               The following table summarizes changes in sales and marketing expenses for the pro forma year ended December 31, 2009, the Predecessor years
         ended December 31, 2008 and 2007, and the Successor period from January 1, 2010 to June 30, 2010, as well as the pro forma period and the Predecessor
         period from January 1, 2009 to June 30, 2009. The table also provides the 2009 breakdown for the Predecessor period from January 1, 2009 to
         November 18, 2009 and the Successor period from November 19, 2009 to December 31, 2009:

                                                       Year ended December 31,                   Predecessor            Successor                  Six months ended June 30,
                                                                                    Pro             Jan. 1 -            Nov. 19 -                                Pro
                                              Predecessor     Predecessor         forma            Nov. 18,              Dec. 31,         Predecessor          forma       Successor
                                                 2007            2008              2009              2009                 2009               2009               2009         2010
                                                                                          (thousands of U.S. dollars, except percentages)
         Sales and marketing                  $     67,195    $    85,630        $126,096        $     111,029          $ 17,267          $     57,343        $57,343      $ 70,998
         As a percentage of net revenues              17.6%          15.5%           17.5%                17.7%               18.7%               17.7%           17.7%         17.5%


             Comparison of the six months ended June 30, 2010 and 2009
                Sales and marketing expenses increased by $13.7 million, or 24%, during the first half of 2010 compared to the same period in the prior year
         primarily due to increases in employee-related costs of $7.7 million. Professional service and consulting costs also increased by $4.7 million compared to
         the prior period primarily due to additional expense related to scaling our processes, systems and infrastructure as a stand-alone company subsequent to
         our separation from eBay. Sales and marketing expense as a percentage of net revenues decreased to 17.5% for the first six months of 2010 compared
         17.7% for the same period in 2009. Pro forma sales and marketing expenses for the six months ended June 30, 2009 were equal to Predecessor sales and
         marketing expenses for the same period.

             Comparison of the years ended December 31, 2009 and 2008
               Sales and marketing expenses for the Predecessor period from January 1, 2009 to November 18, 2009 were $111.0 million, or 17.7% of net
         revenues, and sales and marketing expenses for the Successor period from November 19, 2009 to December 31, 2009 were $17.3 million, or 18.7% of net
         revenues.

                                                                                          99




107 of 341                                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                Sales and marketing expenses increased by $40.5 million, or 47%, in the pro forma year ended December 31, 2009 compared to 2008, primarily due
         to increases in employee-related costs of $15.3 million, including an increase of $4.1 million in employee stock-based compensation expenses, reflecting,
         among other things, increased headcount. Third party advertising costs increased by $21.0 million compared to the previous year, as a result of an
         increased amount spent on paid search and other online marketing campaigns. As a result of these factors, sales and marketing expenses increased as a
         percentage of net revenues to 17.5% for the pro forma year ended December 31, 2009 compared to 15.5% in 2008.

             Comparison of the years ended December 31, 2008 and 2007
                Sales and marketing expenses increased by $18.4 million, or 27%, in 2008 compared to 2007, primarily due to increases in advertising and
         marketing programs, particularly online marketing channels and global television campaigns, partially offset by a decline in employee compensation costs.
         Third party advertising costs increased by $23.8 million compared to the previous year, partially offset by a decrease of $6.6 million in employee related
         expenses. Sales and marketing expenses decreased to 15.5% as a percentage of net revenues for 2008 compared to 17.6% for 2007 primarily as a result of
         significant growth net revenues.

         Product development
               The following table summarizes changes in product development expenses for the pro forma year ended December 31, 2009, the Predecessor years
         ended December 31, 2008 and 2007, and the Successor period from January 1, 2010 to June 30, 2010, as well as the pro forma period and the Predecessor
         period from January 1, 2009 to June 30, 2009. The table also provides the 2009 breakdown for the Predecessor period from January 1, 2009 to
         November 18, 2009 and the Successor period from November 19, 2009 to December 31, 2009:

                                                      Year ended December 31,                  Predecessor           Successor                  Six months ended June 30,
                                                                                  Pro            Jan. 1 -             Nov. 19 -                               Pro
                                              Predecessor     Predecessor       forma            Nov. 18,             Dec. 31,         Predecessor          forma       Successor
                                                 2007            2008            2009              2009                 2009              2009               2009         2010
                                                                                        (thousands of U.S. dollars, except percentages)
         Product development                        22,078    $    31,124       $40,802        $      34,993         $    5,809        $     20,549        $20,549      $ 29,950
         As a percentage of net revenues               5.8%           5.6%          5.7%                 5.6%               6.3%                6.3%            6.3%          7.4%


             Comparison of the six months ended June 30, 2010 and 2009
                Product development expenses increased during the first half of 2010 by $9.4 million, or 46%, compared to the same period of the prior year
         primarily due to an increase in employee-related costs of $5.0 million as a result of increased headcount and an increase in third-party outsourced
         engineering expenses of $2.3 million compared to the first half of 2009. Product development expenses as a percentage of net revenues increased to 7.4%
         for the first six months of 2010 compared to 6.3% for the same period in 2009 as a result of the increase in employee-related expenses. Pro forma product
         development expenses for the six months ended June 30, 2009 were equal to Predecessor product development expenses for the same period.

             Comparison of the years ended December 31, 2009 and 2008
               Product development expenses for the Predecessor period from January 1, 2009 to November 18, 2009 were $35.0 million, or 5.6% of net revenues,
         and product development expenses for the Successor period from November 19, 2009 to December 31, 2009 were $5.8 million, or 6.3% of net revenues.
         Pro forma product development expenses for the year ended December 31, 2009 were equal to the arithmetic sum of the actual product development
         expenses for the Predecessor and Successor periods in 2009.

               Product development expenses increased by $9.7 million, or 31%, in the pro forma year ended December 31, 2009 compared to 2008, primarily due
         to additional employee compensation and third-party

                                                                                        100




108 of 341                                                                                                                                                             8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         consultant costs as a result of increased headcount, focused on expanding our product offerings and platforms and the development of our technological
         infrastructure. Employee-related costs increased $7.6 million, or 32%, from the previous year. Third party consultant charges increased $2.3 million over
         the previous year. Product development expenses were 5.7% as a percentage of net revenues for the pro forma year ended December 31, 2009, broadly
         unchanged from 5.6% for 2008.

             Comparison of the years ended December 31, 2008 and 2007
               Product development expenses increased by $9.0 million, or 41%, in 2008 compared to 2007, primarily due to an increase in employee
         compensation costs as we increased the size of our product development staff and contractors. Employee compensation costs in Estonia, where a
         substantial number of our product development resources have historically been concentrated, were impacted by higher than average inflation during 2008,
         which contributed to the increase in employee compensation costs. Product development expenses were 5.6% as a percentage of net revenues for 2008,
         broadly unchanged from 5.8% for 2007.

         General and administrative
               The following table summarizes changes in general and administrative expenses for the pro forma year ended December 31, 2009, the Predecessor
         years ended December 31, 2008 and 2007, and the Successor period from January 1, 2010 to June 30, 2010, as well as the pro forma period and the
         Predecessor period from January 1, 2009 to June 30, 2009, and the table also provides the 2009 breakdown for the Predecessor period from January 1,
         2009 to November 18, 2009 and the Successor period from November 19, 2009 to December 31, 2009:

                                                      Year ended December 31,                  Predecessor           Successor                  Six months ended June 30,
                                                                                  Pro            Jan. 1 -             Nov. 19 -                               Pro
                                              Predecessor     Predecessor       forma            Nov. 18,             Dec. 31,         Predecessor          forma       Successor
                                                 2007            2008            2009              2009                 2009              2009               2009         2010
                                                                                        (thousands of U.S. dollars, except percentages)
         General and administrative           $     41,169    $    51,863       $75,821        $      50,208         $ 113,284         $     23,681        $30,767      $ 46,824
         As a percentage of net revenues              10.8%           9.4%         10.5%                 8.0%             122.5%                7.3%            9.5%         11.5%


             Comparison of the six months ended June 30, 2010 and 2009
               General and administrative expenses increased during the first six months of 2010 by $23.1 million, or 98%, compared to our actual general and
         administrative expenses for the same period of 2009, due in part to $7.3 million of monitoring fees incurred under the management services agreements we
         entered into in connection with the Skype Acquisition. See “Certain Relationships and Related Party Transactions—Management Service Agreements.”

                In addition, general and administrative expenses increased during the first six months of 2010 by $16.1 million, or 52%, compared to our pro forma
         general and administrative expenses for the same period of 2009, primarily due to an increase of $10.8 million in employee-related expenses resulting
         from an increase in headcount in order to meet the demands of our expanding business. Third party professional services costs increased by $4.5 million
         for the first six months of 2010 compared to the same period in pro forma 2009, due primarily to the ongoing costs incurred relating to our separation from
         eBay. In addition, general and administrative expenses increased by $2.1 million as a result of expenses we incurred under the Transition Services
         Agreement during the period. See “Certain Relationships and Related Party Transactions—Acquisition-Related Matters—The Skype Acquisition and
         Ancillary Agreements—Transition Services Agreement.” These amounts were partially offset by a decrease of $3.9 million as a result of there being no
         corporate allocations from eBay after the Skype Acquisition, which previously included centralized legal, tax, treasury, information technology, employee
         costs, corporate services and other infrastructure costs provided to us by eBay.

                                                                                        101




109 of 341                                                                                                                                                             8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                      http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

             Comparison of the years ended December 31, 2009 and 2008
                General and administrative expenses for the Predecessor period from January 1, 2009 to November 18, 2009 were $50.2 million, or 8.0% of net
         revenues. General and administrative expenses for the Successor period from November 19, 2009 to December 31, 2009 were $113.3 million, or 122.5%
         of net revenues, which were substantially higher than the previous period as a result of transaction fees and expenses of $98.7 million that we paid directly
         in connection with the Skype Acquisition. These transaction fees included a transaction success fee of $60.0 million paid to certain shareholders including
         Silver Lake, CPPIB and Andreessen Horowitz, and $37.4 million paid to other third parties primarily relating to legal and advisory fees.

                General and administrative expenses on a pro forma basis increased by $24.0 million, or 46%, in pro forma year ended December 31, 2009
         compared to 2008. Pro forma results for year ended December 31, 2009 reflect monitoring fees of $14.2 million that are payable under management
         service agreements entered into with the certain of our shareholders in connection with the Skype Acquisition. In addition, employee-related costs
         increased by $8.8 million, or 43%, in the pro forma year ended December 31, 2009 compared to 2008, which was primarily due to an increase in
         headcount in order to meet the demands of our expanding business. Corporate allocations increased by $3.4 million primarily as a result of direct legal
         fees incurred by eBay in connection with the Joltid litigation settlement, which was offset partially by a decrease of $4.5 million of costs relating to legal
         and professional service charges incurred directly by Skype. Due to the aforementioned factors, general and administrative expenses increased as a
         percentage of net revenues to 10.5% for the pro forma year ended December 31, 2009 compared to 9.4% for 2008.

             Comparison of the years ended December 31, 2008 and 2007
                General and administrative expenses increased by $10.6 million, or 27%, in 2008 compared to 2007, primarily due to growth in employee-related
         expenses, legal fees and professional services. Employee-related costs increased by $4.7 million compared to 2007, which were driven by additional
         recruiting costs and an increase in headcount in order to meet the demands of our expanding business. In addition, our litigation and professional services
         costs increased by $4.2 million compared to those incurred in 2007 due to increased activity on several patent litigation matters. General and
         administrative expenses decreased as a percentage of net revenues from 2007 to 2008 primarily as a result of the overall growth of our business. General
         and administrative expenses as a percentage of net revenues were 9.4% for 2008, compared to 10.8% for 2007.

         Amortization of acquired intangible assets
               The following table summarizes changes in amortization of acquired intangible assets expenses for the pro forma year ended December 31, 2009, the
         Predecessor years ended December 31, 2008 and 2007, and the Successor period from January 1, 2010 to June 30, 2010, as well as the pro forma period
         and the Predecessor period from January 1, 2009 to June 30, 2009. The table also provides the 2009 breakdown for the Predecessor period from
         January 1, 2009 to November 18, 2009 and the Successor period from November 19, 2009 to December 31, 2009:

                                                              Year ended December 31,                  Predecessor            Successor                  Six months ended June 30,
                                                                                          Pro            Jan. 1 -             Nov. 19 -
                                                      Predecessor    Predecessor        Forma            Nov. 18,              Dec. 31,       Predecessor         Pro forma        Successor
                                                         2007           2008             2009              2009                 2009             2009                2009            2010
                                                                                                 (thousands of U.S. dollars, except percentages)
         Amortization of acquired intangible assets   $    65,514    $    69,832        $114,307       $      55,453          $ 13,284        $     31,147        $ 57,153         $ 57,154
         As a percentage of net revenues                     17.2%          12.7%           15.9%                8.9%               14.4%              9.6%             17.6%           14.1%


             Comparison of the six months ended June 30, 2010 and 2009
               The increase in amortization of acquired intangibles during the first six months of 2010 of $26.0 million, or 83%, compared to our actual
         amortization of acquired intangibles expenses in the same period in 2009 was

                                                                                                  102




110 of 341                                                                                                                                                                        8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         primarily due to the establishment of a new basis in accounting of our identifiable intangible assets as a result of the Skype Acquisition. The purchase price
         was allocated to assets and liabilities, including the identifiable intangible assets, based on their estimated fair value at the acquisition date on
         November 19, 2009, resulting in an increase in the basis of intangibles subject to amortization.

                Our amortization of acquired intangibles for the first six months of 2010 was broadly the same as our pro forma amortization of acquired intangibles
         cost for the same period in 2009.

             Comparison of the years ended December 31, 2009 and 2008
               Amortization of acquired intangible assets expenses for the Predecessor period from January 1, 2009 to November 18, 2009 was $55.5 million, or
         8.9% of net revenues and amortization of acquired intangible assets for the Successor period from November 19, 2009 to December 31, 2009 was $13.3
         million, or 14.4% of net revenues.

                The increase of $44.5 million, or 64%, in pro forma year ended December 31, 2009 compared to 2008 was primarily due to the pro forma effect of
         the establishment of a new basis in accounting of the Company’s identifiable intangible assets as a result of the Skype Acquisition, reflected as of
         January 1, 2009.

             Comparison of the years ended December 31, 2008 and 2007
               The increase of $4.3 million, or 7%, in 2008 compared to 2007 was primarily due to the impact of foreign currency movements between the U.S.
         dollar and Euro, which was partially affected by the impact of the end of the estimated useful life of certain other identifiable intangible assets.

         Litigation settlement
                The litigation settlement expense was incurred in connection with the settlement that we and eBay reached with Joltid regarding our use of the
         “Global Index” technology that facilitates communications in the peer-to-peer network of Skype users. In connection with the settlement, we acquired
         ownership of the intellectual property rights in the software and related technology known as the “Global Index.” See “—Key Factors Affecting Results of
         Operations,” “Certain Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid Transaction” and Note 13 to our audited
         consolidated financial statements included elsewhere in this prospectus for further information. The litigation settlement expense was $343.8 million for
         the Predecessor period from January 1, 2009 to November 18, 2009. There was no litigation settlement expense in any other period, and pro forma
         litigation settlement expense for the year ended December 31, 2009 was equal to the litigation settlement expense for the Predecessor period from
         January 1, 2009 to November 18, 2009.

         Impairment of goodwill
               During 2007, 2008 and 2009, we conducted our annual impairment test of goodwill as of August 31. See “—Critical Accounting Policies, Judgments
         and Estimates—Goodwill and Intangible Assets” for more information on our goodwill accounting policy. As a result of this test, no goodwill impairment
         charges were recorded during 2009 and 2008. However, in 2007, we recorded a charge of $1.4 billion impairment of goodwill. The 2007 impairment
         charge was determined by comparing the carrying value of goodwill in eBay’s Communications reporting unit with the implied fair value of the goodwill.
         The fair value of the Communications reporting unit was determined using the income approach, which required the estimation of future operating results
         and cash flows discounted using an estimated discount rate. We revised our estimates of our future operating results based on our then updated long-term
         financial outlook developed as part of eBay’s strategic planning cycle conducted in the third quarter of 2007 and, as a result, recorded an impairment of
         goodwill. Then, as now, our estimates of our future operating results are for an early stage business with limited financial history, as well as a developing
         revenue model. These factors increase the risk of differences between

                                                                                      103




111 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                 http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         projected and actual performance that could impact future estimates of fair value. See “Risk Factors—Goodwill and intangible asset impairment analysis
         may result in charges, which may be significant” and Note 4 to our audited consolidated financial statements included elsewhere in this prospectus. We
         expect to conduct our annual impairment test of goodwill for 2010 in the second half of 2010.

         Realized loss on amended credit agreement
                The realized loss on amended credit agreement was recognized as a result of the significant amendments in February 2010 to our Amended Five
         Year Credit Agreement and changes in lenders thereunder. For details of the Five Year Credit Agreement we entered into in November 2009 to finance, in
         part, the Skype Acquisition and the amendment thereof, see “—Liquidity and Capital Management—Indebtedness.”

                Due to the significant amendments to the Five Year Credit Agreement and changes in lenders, $242.5 million of the original term loan was deemed
         “extinguished” for accounting purposes, and $457.5 million was deemed “modified” for accounting purposes. As a result, a realized loss on the amended
         credit agreement of $13.5 million relating to the deferred financing fees and the original issue discount associated with the portion of the loan that was
         considered extinguished was recorded during period ended June 30, 2010. There was no realized loss on amended credit agreement expense in any other
         period.

         Interest income and other (expense), net
               The following table summarizes the development of interest income and other (expense), net for the pro forma year ended December 31, 2009, the
         Predecessor years ended December 31, 2008 and 2007, and the Successor period from January 1, 2010 to June 30, 2010, as well as the pro forma period
         and the Predecessor period from January 1, 2009 to June 30, 2009. The table also provides the 2009 breakdown for the Predecessor period from
         January 1, 2009 to November 18, 2009 and the Successor period from November 19, 2009 to December 31, 2009:

                                                           Year ended December 31,                 Predecessor            Successor                  Six months ended June 30,
                                                                                       Pro           Jan. 1 -             Nov. 19 –                               Pro
                                                    Predecessor    Predecessor       forma           Nov. 18,              Dec. 31,        Predecessor          forma          Successor
                                                       2007           2008            2009            2009                  2009              2009               2009            2010
                                                                                             (thousands of U.S. dollars, except percentages)
         Interest income and other (expense), net   $     5,303    $    10,297       $2,943        $      (2,549)         $    5,492       $     (6,119)        $(6,119)       $ 31,330
         As a percentage of net revenues                    1.4%           1.9%         0.4%                (0.4)%               5.9%              (1.9)%          (1.9)%            7.7%

               Interest income and other (expense), net, consists of interest earned on cash, cash equivalents and investments, as well as foreign exchange
         transaction gains and losses and other miscellaneous transactions not related to our primary operations. Interest expense incurred on our long-term debt is
         included separately in our results of operations under “—Interest expense,” below.

             Comparison of the six months ended June 30, 2010 and 2009
               Interest income and other (expense), net amounted to a net income of $31.3 million during the first six months of 2010, representing an increase of
         $37.4 million compared to a net expense of $6.1 million for the same period of the prior year. This increase was due primarily to a realized foreign
         currency exchange gain of $32.2 million resulting from the foreign exchange impact on our non-U.S. dollar monetary assets and liabilities during the
         period. The weighted average rate of return from of our cash and cash equivalents was 0.2%, a decrease of 0.8% from the weighted average rate of return
         during the same period of the prior year.

                Pro forma interest income and other (expenses), net for the six months ended June 30, 2009 were equal to Predecessor pro forma interest income and
         other (expenses), net for the same period.

                                                                                             104




112 of 341                                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

             Comparison of the years ended December 31, 2009 and 2008
               Interest income and other (expense), net amounted to a net expense of $2.5 million for the Predecessor period from January 1, 2009 to November 18,
         2009, or (0.4)% of net revenues and consists of interest income on cash and cash equivalent and investments of $1.8 million, foreign exchange losses of
         $1.1 million and other expenses of $3.2 million relating primarily to the impairment of our interest in a minority equity investment in the amount of $4.1
         million. Interest income and other (expense), net was a net positive of $5.5 million for the Successor period from November 19, 2009 to December 31,
         2009, or 5.9% of net revenues, and primarily comprised of foreign exchange gains of $5.0 million due to the foreign exchange impact on our non-U.S.
         dollar monetary assets and liabilities during the period.

               Pro forma interest income and other (expense), net, was equal to the arithmetic sum of the actual amounts for the Predecessor and Successor periods
         in 2009.

               Interest income and other (expense), net decreased by $7.4 million in the pro forma year ended December 31, 2009 compared to 2008, due primarily
         to lower interest income earned on our cash and cash equivalents balances. Total interest earned in the pro forma year ended December 31, 2009 was $1.8
         million compared to $6.4 million in 2008, a decrease of $4.6 million. The weighted average rate of return from our cash and interest bearing investment
         portfolio decreased to 0.6% in pro forma 2009 from 3.3% in 2008 due to lower prevailing interest rates. In addition, we recorded a gain due to foreign
         exchange movements of $3.8 million for the pro forma year ended December 31, 2009, as compared to a gain of $3.7 million for the year ended
         December 31, 2008.

             Comparison of the years ended December 31, 2008 and 2007
               Interest income and other (expense), net increased by $5.0 million in 2008 compared to 2007, due primarily to a year-over-year increase in our cash
         and cash equivalents balance of $144.3 million on which we earn interest. Total interest earned in 2008 was $6.4 million in 2008 compared to $4.0
         million in 2007. The weighted average rate of return from our cash and interest bearing investment portfolio decreased to 3.3% in 2008 from 3.9% in
         2007. In addition, foreign exchange gains increased by $2.7 million in 2008 compared to 2007.

         Interest expense
             Comparison of the six months ended June 30, 2010 and 2009
                We incurred $35.6 million in interest expense for the six months ended June 30, 2010 due to interest relating to the debt incurred on November 19,
         2009 to fund the Skype Acquisition. There was no such comparable interest expense for the six months ended June 30, 2009. The pro forma interest
         expense for the six months ended June 30, 2009 was $44.5 million. The decreased interest expense for the first six months of 2010 reflects the drop in the
         effective interest rate on the loan from 11.0% in pro forma 2009 to 9.4% in the first six months of 2010 and a reduction in the weighted average amounts
         outstanding between the periods.

             Comparison of the years ended December 31, 2009, 2008 and 2007
              We incurred $10.4 million in interest expense for the Successor period from November 19, 2009 to December 31, 2009. Such interest expense
         accounted for 11.2% of our net revenues for such period. There was no such comparable expense for the Predecessor period from January 1, 2009 to
         November 18, 2009 or for 2008 or 2007.

               On a pro forma basis, we incurred $79.2 million in interest expense for the pro forma year ended December 31, 2009 due to interest accruing on the
         Five Year Credit Agreement for the full year on a pro forma basis.

                                                                                     105




113 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                    http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Income tax (benefit)/ expense
               The following table summarizes our income tax expenses (benefit) for the Predecessor years ended December 31, 2008 and 2007, the Predecessor
         period from January 1, 2009 to November 18, 2009, the Successor period from November 19, 2009 to December 31, 2009, the Predecessor period from
         January 1, 2009 to June 30, 2009 and the Successor period from January 1, 2010 to June 30, 2010:

                                                                                                                       Predecessor                Successor
                                                                        Year ended December 31,                           Jan. 1 -                Nov. 19 –              Six months ended June 30,
                                                                    Predecessor            Predecessor                   Nov. 18,                  Dec. 31,          Predecessor            Successor
                                                                       2007                   2008                         2009                     2009                2009                  2010
                                                                                                                   (thousands of U.S. dollars, except percentages)
         Income tax (benefit) / expense                             $ (23,342)             $    (8,447)                 $     3,950                  $ (7,209)       $    2,327            $(29,486)
         As a percentage of net revenues                                  (6.1)%                   (1.5)%                        0.6%                     (7.8)%             0.7%               (7.3)%
         Effective tax rate(1)                                             1.6%                  (25.5)%                        (1.5)%                     6.7%              9.4%              25.9%
         (1)    The June 30, 2010 effective tax rate presented in the table is our estimated annual effective tax rate for the year ending December 31, 2010.

                Our tax expense is lower than the amount computed by applying the statutory Luxembourg tax rate to pre-tax U.S. GAAP income, because our taxable
         income is reduced as a consequence of, among other things, our intercompany licensing transactions and historic net operating losses in Luxembourg.
         However, these effects are partially offset by certain expenses for which we cannot recognize a deduction, such as stock based compensation. In addition,
         we could not recognize a tax deduction for our goodwill impairment expense in 2007, the Joltid litigation settlement expense in the Predecessor period
         from January 1, 2009 to November 18, 2009 and the Skype Acquisition fees and expenses in the Successor period from November 19, 2009 to
         December 31, 2009. Furthermore, to the extent that we build net operating loss carryforwards in Luxembourg and Ireland as described above, we have
         historically recognized significant valuation allowances.

               Comparison of the six months ended June 30, 2010 and 2009
              During the six months ended June 30, 2010, we realized a net tax benefit of $29.5 million primarily because our taxable income was reduced as a
         consequence of our intercompany licensing transactions and our ability to recognize tax benefits of operating losses in certain tax jurisdictions.

               During the six months ended June 30, 2009, we had a tax expense of $2.3 million. Our overall tax expense was much lower than the tax expense
         computed by applying the Luxembourg statutory tax rate of 28.6% to pre-tax income, due primarily to a reduction of taxable income as a result of our
         intercompany licensing transactions and historic net operating losses in Luxembourg.

               Comparison of the years ended December 31, 2009, 2008 and 2007
                During the Successor period from November 19, 2009 to December 31, 2009, we realized a tax benefit of $7.2 million. Our tax benefit was lower
         than the Luxembourg statutory tax rate of 28.6% applied to pre-tax loss, due primarily to the non-deductibility for tax purposes of transaction costs related
         to the Skype Acquisition.

               During the Predecessor period from January 1, 2009 through November 18, 2009, we incurred a tax expense of $4.0 million, even though we
         incurred pre-tax losses, due primarily to our inability to deduct the Joltid litigation settlement for the Predecessor period.

               During 2008, we realized a net tax benefit of $8.4 million primarily because our taxable income was reduced as a consequence of our intercompany
         licensing transactions.

               During 2007, we realized a tax benefit of $23.3 million primarily because our taxable income was reduced as a consequence of our intercompany
         licensing transactions. Our tax benefit was lower than the Luxembourg statutory rate of 29.6% applied to pre-tax loss due primarily to non-deductibility for
         tax purposes of the goodwill impairment charges recorded in 2007.

                                                                                                                106




114 of 341                                                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Selected Quarterly Operating Results (unaudited)
               The following table presents unaudited quarterly condensed statement of operations data for the seven Predecessor quarters ended September 30,
         2009, the Predecessor for the period from October 1, 2009 to November 18, 2009, the Successor for the period from November 19, 2009 to December 31,
         2009, and the two Successor quarters ended March 31, 2010 and June 30, 2010. We have prepared the unaudited quarterly financial information on a
         consistent basis with the audited consolidated financial statements included in this prospectus, and the financial information reflects all normal, recurring
         adjustments for any quarter that we consider necessary for a fair statement of such information in accordance with GAAP.

                                                                                     107




115 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                The historical quarterly financial data presented below do not purport to be indicative of our results of operations for any future period. The data
         presented below should be read in connection with “Capitalization,” “Selected Financial Data,” the other information in this section “Management’s
         Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere
         in this prospectus.

                                                                                    Predecessor                                                                    Successor
                                          Three     Three       Three        Three       Three       Three         Three                                                Three              Three
                                          months    months     months        months      months     months         months          October 1,         November 19,      months            months
                                          ended     ended       ended        ended       ended       ended         ended            2009 to             2009 to         ended              ended
                                         March 31, June 30, September 30, December 31, March 31, June 30, September 30, November 18,                  December 31,    March 31,           June 30,
                                           2008      2008        2008         2008         2009      2009           2009             2009                2009            2010               2010
                                                                                          (thousands of U.S. dollars, except share data)
         Net revenues:                   $ 127,260 $ 135,820 $     143,279 $    145,005 $ 153,209 $ 171,629 $          186,429 $         115,191      $      92,445      $ 199,255   $ 206,915
         Cost of net revenues               68,791    71,968        71,485       77,809      79,580   81,558            85,126            47,269             44,836(1)      98,795(1) 101,025(1)
                  Gross profit              58,469    63,852        71,794       67,196     73,629    90,071           101,303            67,922             47,609        100,460     105,890
         Operating expenses:
                  Sales and marketing         22,531    20,939        22,835          19,280     27,164      30,179       31,691          21,995             17,267           34,642        36,356
                  Product development          7,577     8,386         7,367           7,816      9,725      10,824        8,495           5,949              5,809           15,111        14,839
                  General and
                       administrative         13,649    13,928        11,864          12,445     11,762      11,919       15,783          10,744            113,284(2)        21,877        24,947
                  Amortization of
                       acquired
                       intangible assets      17,760    18,516        17,845          15,711     15,675      15,472       16,243           8,063             13,284(1)        28,577(1)     28,577(1)
                  Litigation settlement         —         —             —               —          —           —            —            343,826(3)            —                —             —
                           Total
                                operating
                                expenses      61,517    61,769        59,911          55,252     64,326      68,394       72,212         390,577            149,644          100,207       104,719
         (Loss)/income from
             operations                       (3,048)    2,083        11,883          11,944      9,303      21,677       29,091        (322,655)          (102,035)            253           1,171
         Realized loss on amended
             credit agreement(4)                —         —              —              —          —           —            —               —                  —             (13,513)          —
         Interest income and other
             (expense), net                    4,071     2,165          (129)          4,190     (1,563)     (4,556)        765            2,805              5,492            7,474         23,856
         Interest expense(5)                    —         —              —              —          —           —            —               —               (10,387)         (19,494)       (16,112)
         (Loss)/income before income
             taxes                             1,023     4,248        11,754          16,134      7,740      17,121       29,856        (319,850)          (106,930)         (25,280)         8,915
         Income tax (benefit)/
             expense                          (6,184)  (6,752)         2,698           1,791      1,178    1,149           1,230             393             (7,209)         (13,341)       (16,145)
         Net income (loss)                $    7,207 $ 11,000 $        9,056 $        14,343 $    6,562 $ 15,972 $        28,626   $    (320,243)     $     (99,721)     $   (11,939)     $ 25,060

                                                                                                       108




116 of 341                                                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents


         (1)   Cost of net revenues and amortization of acquired intangible assets for the Successor period from November 19, 2009 to December 31, 2009 include $4.2 million and $13.3 million of amortization costs,
               respectively, and for the quarter ended March 31, 2010 include $9.0 million and $28.6 million, respectively, and for the quarter ended June 30, 2010 include $9.0 million and $28.6 million, respectively,
               relating to the amortization of the intangible assets acquired in the Skype Acquisition. The increase from the Predecessor period is a result of the Skype Acquisition, whereby the gross carrying amount of
               intangible assets increased from $340.5 million as of December 31, 2008 to $805.6 million as of December 31, 2009.
         (2)   This amount includes $98.7 million of transaction fees and expenses incurred in connection with the Skype Acquisition.
         (3)   This amount represents the net charge incurred by us in connection with the settlement by us and eBay of a dispute with Joltid over our use of peer-to-peer communication technology. For more
               information and a breakdown on the components of this charge, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Results
               of Operations,” “Certain Relationships and Related Party Transactions” and Note 13 to our audited consolidated financial statements included elsewhere in this prospectus.
         (4)   This amount represents the expense incurred in connection with the amendment of our Amended Five Year Credit Agreement in February 2010, described under “Management’s Discussion and Analysis
               of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”
         (5)   This amount represents the net interest expense incurred in connection with the indebtedness incurred to finance the Skype Acquisition, as described further under “Management’s Discussion and
               Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

               Our quarterly net revenue and results of operations are difficult to predict and have in the past and may in the future fluctuate from quarter to quarter.
         Our planned operating expenses are based in part on our expectations of future revenue. If revenue for a particular quarter is lower than we expect, we may
         be unable to proportionately reduce our operating expenses for that quarter, which would negatively impact our operating results for that quarter. We do
         not believe that period-to-period comparisons of our operating results should be relied upon as an indication of future performance. In future periods, the
         market price of our ADSs could decline if our revenue and results of operations are below the expectations of analysts and investors. For additional
         discussion of factors that may cause our revenue and operating results to fluctuate, please see those discussed in the “Risk Factors” section of this
         prospectus.

               Our quarterly results of operations are more significantly impacted by particular events than our results over longer time periods. For example, our
         net revenues for the quarter ended March 31, 2010 were impacted by a change in our terms and conditions affecting the timing of recognition of revenue
         from inactive credit of our users, resulting in a negative impact of $4.9 million on our gross profit in the first quarter of 2010. See “—Critical Accounting
         Policies, Judgments and Estimates—Revenue Recognition.” In addition, the delay of entry into a commercial contract in the second quarter of 2010
         negatively impacted our net revenues and gross margin.

         Effects of Currency Fluctuations on Net Revenues
                We have substantial global operations, and our products are generally priced in the local currencies of the countries in which we operate. We report
         our financial results in U.S. dollars; therefore, fluctuations in foreign currency exchange rates impact our net revenues. As the U.S. dollar strengthens or
         weakens against the local currencies in which we generate revenues, our net revenues recorded in U.S. dollar will decrease or increase, respectively
         irrespective of our growth in the number of connected users and their use of our paid products. For example, if average foreign exchange rates had
         remained constant between the quarters ended March 31, 2010 and June 30, 2010, our net revenues for the quarter ended June 30, 2010 would have been
         higher by $9.0 million than reported.

         Seasonality
               Our net revenues exhibits seasonality because many of our users reduce their use of our products with the onset of good weather during the Northern
         Hemisphere’s summer months and our users tend to use our products more in the fourth quarter during the holiday season resulting in weaker net revenue
         growth during the second and third quarter of the year. Furthermore, we experience significant spikes in the use of our products during significant world
         events, such as Christmas and the Chinese New Year, or regional events, such as the recent

                                                                                                               109




117 of 341                                                                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         volcanic eruption in Iceland. Due to our high revenue growth rate, the timing of product launches and movements in foreign exchange rates, the seasonality
         trends are not substantial when reviewing our quarter over quarter results since January 2008. Furthermore, our rapid growth may have made it more
         difficult for us to identify seasonal aspects of our business that may exist.


         Adjusted EBITDA

                To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we use Adjusted EBITDA as a non-GAAP
         performance measure. We present Adjusted EBITDA because it is used by our board of directors and management to evaluate our operating performance,
         and we consider it an important supplemental measure of our performance. Adjusted EBITDA, as we present it, represents net income before income tax
         (benefit)/expense, interest expense, interest income and other (expense), net, depreciation and amortization, further adjusted for the following additional
         items:
                •    Stock-based compensation expense;
                •    Impairment of goodwill;
                •    Realized loss upon amendment of our Five Year Credit Agreement;
                •    Costs we incurred as a result of the Skype Acquisition, such as external transaction costs, payments under management services agreements
                     with shareholders of Skype, transition services agreement costs payable to eBay and cash bonuses to certain Skype employees;
                •    Litigation settlement costs;
                •    Separation cost incurred subsequent to the Skype Acquisition; and
                •    Foreign exchange gains and losses prior to invoice receipt.

               Adjusted EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. In addition, this non-GAAP
         measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations in that it
         does not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. In particular:
                •    Unless reconciled to our pro forma net income, Adjusted EBITDA is not a pro forma measure, nor does it purport to represent what our
                     consolidated results of operations would have been had the Skype Acquisition not occurred or occurred on a different date;
                •    Adjusted EBITDA is not indicative of our future consolidated results of operations;
                •    Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures;
                •    Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal
                     payments, on our debt;
                •    Adjusted EBITDA does not reflect our tax expense; and
                •    Others may calculate Adjusted EBITDA differently than we do and these calculations may not be comparable to our Adjusted EBITDA metric.

                                                                                    110




118 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               The following table reconciles our Adjusted EBITDA for the Predecessor years 2007, 2008, the Predecessor period from January 1, 2009 to
         November 18, 2009, the Successor period from November 19, 2009 to December 31, 2009, the pro forma year 2009, and each of the six months ended
         June 30, 2009 (Predecessor and pro forma) and 2010 to the nearest U.S. GAAP performance measure, which is net income (loss):

                                                                                                                                  Predecessor       Successor
                                                                                    Year ended December 31,                          Jan 1 –         Nov. 19 –                   Six months ended June 30,
                                                                           Predecessor      Predecessor         Pro forma            Nov. 18,         Dec. 31,          Predecessor        Pro forma         Successor
                                                                              2007             2008              2009 (1)             2009             2009                2009             2009 (1)           2010
                                                                                                                                   (thousands of U.S. dollars)
         Net (loss)/income                                                    (1,405,336)          41,606          (417,547)           (269,083)        (99,721)                22,534         (46,440)          13,121
         Income tax (benefit)/ expense                                           (23,342)          (8,447)          (21,398)              3,950           (7,209)                2,327         (24,380)         (29,486)
         Interest expense                                                           —                 —              89,643                —             10,387                   —             44,527           35,606
         Interest income and other expense, net                                   (5,303)         (10,297)           (2,942)              2,549           (5,492)                6,119           6,119          (31,330)
         Depreciation and amortization                                            73,303           75,534           156,543              60,649          18,400                 33,571          77,639           79,234
         Stock-based compensation                                                 10,269           12,826            14,746              14,485              261                 8,836           8,836            3,081
         Impairment of goodwill                                                1,390,938              —                —                   —                —                     —               —                 —
         Realized loss on credit agreement                                          —                 —                —                   —                —                     —               —              13,513
         Management Services Agreements with shareholders(2)                        —                 —              14,177                —               1,685                  —              7,086            7,294
         Skype Acquisition transaction fees(3)                                      —                 —                —                   —             98,715                   —               —                 —
         Skype Acquisition transaction bonuses(4)                                   —                 —                —                  3,647             —                     —               —                 —
         Transition Services Agreement(5)                                           —                 —               1,118                                1,118                  —               —               2,111
         Excluded bonus(6)                                                          —                 —               1,755                 144            1,611                  —               —               6,107
         Joltid litigation settlement(7)                                            —                 —             343,826             343,826             —                     —               —                 —
         Other litigation settlements(8)                                            —                (410)            2,928               2,928             —                     —               —                (784)
         Separation costs(9)                                                        —                 —               2,054                 873            1,181                  —               —               5,166
         Foreign exchange gains and losses prior to invoice receipt(10)             —                (334)               (8)             (1,140)           1,132                 1,849           1,849           12,118
         Adjusted EBITDA                                                          40,529          110,478           184,895             162,828          22,068                 75,236          75,236          115,751

         (1)  See “Unaudited Pro Forma Condensed Consolidated Financial Information” and the notes thereto included elsewhere in this prospectus to understand how pro forma net income was computed.
         (2)  In connection with the Skype Acquisition, we entered into management service agreements with certain of our shareholders and their affiliates, which provide for the payment of periodic monitoring fees
              for management, financial, consulting and other advisory services provided by them to us after completion of the Skype Acquisition. We expect to incur aggregate monitoring fees of $            million per
              annum (payable pro rata, quarterly in arrears) for the period from November 19, 2009 to December 31, 2021. See “Certain Relationships and Related Party Transactions—Management Services
              Agreements.”
         (3) This amount represents the external transaction fees and expenses incurred in connection with the Skype Acquisition.
         (4) This amount represents cash bonus payments to certain Skype executives that vested upon the completion of the Skype Acquisition.
         (5) Our indirect subsidiary, Skype Technologies S.A., entered into a transition services agreement with eBay pursuant to which eBay has agreed to provide us certain transition services in connection with the
              conduct of our business. The initial term is one year from the date of the Skype Acquisition, except for customer service applications support, the term for which was six months. See “Certain
              Relationships and Related Party Transactions—Acquisition-Related Matters—The Skype Acquisition and Ancillary Agreements—Transition Services Agreement.”
         (6) In conjunction with the Skype Acquisition, a special cash pool was funded to reward eligible Skype employees. Employees are eligible to receive a bonus based on continued employment that will vest on
              the one-year anniversary of the Skype Acquisition. The total estimated value of the awards to be granted and funded is $ 10.0 million and was recorded as an asset in the opening balance sheet of the
              Skype Companies and is being amortized as compensation expense based on the actual value of the awards that are estimated to vest. See “Certain Relationships and Related Party Transactions
              —Acquisition-Related Matters—The Skype Acquisition and Ancillary Agreements—Cash Pool.” In addition, certain employees are eligible for bonus payments that will vest prior to or on one-year
              anniversary of the Skype Acquisition based on the successful achievement of certain strategic initiatives outlined by the Company in conjunction with our separation from eBay.
         (7) This amount represents the net charge incurred by us in connection with the settlement by us and eBay of a dispute with Joltid over our use of peer-to-peer communication technology. For more
              information about the Joltid Transaction, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Results of Operations”, “Certain
              Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid Transaction” and Note 13 to our audited consolidated financial statements included elsewhere in this prospectus.
         (8) Reflects additional losses or (gains) we recorded related to litigation settlements other than the Joltid Transaction discussed above. See “Business—Legal Proceedings” for a discussion of other legal and
              regulatory proceedings, disputes and regulatory inquiries related to our business.
         (9) Separation costs primarily relate to external service provider fees for strategic projects aimed at building processes for scaling the Company subsequent to the Skype Acquisition, establishing new
              employee benefit structures and compensation programs and planning for the implementation of our stand alone IT infrastructure, as well as tax, legal and other consulting fees related to our separation
              from eBay.
         (10) Under U.S. GAAP, foreign currency gains and losses arising from the re-measurement of monetary assets and liabilities into our functional currencies (“foreign currency gains and losses”) are recorded
              in our Consolidated Statements of Operations as a component of interest income and other (expense), net. As indicated above, we remove the total amount of interest income and other (expense), net
              from our calculation of Adjusted EBITDA. However, we do include in Adjusted EBITDA the foreign currency gains and losses arising between the date of initial expense recognition and the date of
              invoice receipt, at which point we believe management has less control over foreign currency gains and losses.

                                                                                                               111




119 of 341                                                                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Liquidity and Capital Resources
               Since the Skype Acquisition, our principal sources of liquidity have been cash provided by operating activities, proceeds from our Amended Five
         Year Credit Agreement and the proceeds from the issuance of common stock in the Skype Acquisition. As of June 30, 2010, our principal sources of
         liquidity consisted of $85.5 million of cash and cash equivalents and $29.3 million available under the revolving credit facility under our Amended Five
         Year Credit Agreement. Our total indebtedness was $727.9 million as of June 30, 2010. In 2009, we had needs for liquidity with respect to the payment
         made to acquire the Skype Companies and associated costs, such as the cash component of the Joltid Transaction. Our principal needs for liquidity for the
         foreseeable future will be directed towards debt service costs and capital expenditures, such as the purchase of property and equipment. At June 30, 2010,
         outstanding letters of credit were $0.7 million against the line of credit under our revolving credit facility.

         Cash Flows

                                                                                 Predecessor                              Successor    Predecessor       Successor
                                                                                                  Period from            Period from                         Six
                                                                                                   January 1,           November 19,   Six months          months
                                                                  Year ended      Year ended        2009 to                 2009 to       ended            ended
                                                                 December 31,    December 31,    November 18,           December 31,    June 30,          June 30,
                                                                     2007            2008            2009                    2009         2009              2010
                                                                                                         (thousands of U.S. dollars)
         Net cash provided by (used in) operating activities     $     80,220    $ 148,801       $ 128,049            $ (150,913)      $ 93,976         $ 64,830
         Net cash provided by (used in) investing activities         (536,020)      (4,964)         (11,733)           (1,958,981)       (5,264)         (12,869)
         Net cash provided by (used in) financing activities          468,354       13,305         (263,302)            2,082,013           —            (67,234)
         Effect of exchange rate changes on cash and cash
            equivalents                                              9,778         (12,839)          29,127                   (370)        4,966         (13,311)
         Net increase (decrease) in cash and cash equivalents       22,332         144,303         (117,859)               (28,251)       93,678         (28,584)
         Cash and cash equivalents at beginning of period           93,552         115,884          260,187                142,328       260,187         114,077
         Cash and cash equivalents at end of period              $ 115,884       $ 260,187       $ 142,328            $    114,077     $ 353,865        $ 85,493

         Operating Activities
               We generated cash from operating activities in amounts exceeding our net loss or income reported for 2007, 2008 and the Predecessor period from
         January 1, 2009 to November 18, 2009 and for the six months ended June 30, 2009 and 2010 due primarily to non-cash charges to earnings and changes in
         working capital. Non-cash charges to earnings primarily include depreciation and amortization on our long-term assets, share-based compensation expense
         and provisions for doubtful accounts. In addition, non-cash charges in 2007 included a $1.4 billion goodwill impairment charge. Non-cash charges in the
         Predecessor period from January 1, 2009 to November 18, 2009 include the $241.2 million non-cash component of the Joltid litigation settlement and
         $102.7 million increase in liability associated with the Joltid litigation settlement. See “Certain Relationships and Related Party Transactions” and Note
         13 to our audited consolidated financial statements included elsewhere in this prospectus.

               We generate favorable working capital because a majority of our users purchase prepaid credit which is recorded as deferred revenue and user
         advances when collected and recognized as net revenue at the time users use the credit. When a customer purchases a subscription to use our other
         paid-products over a specified period, the amount collected is initially recorded as deferred revenue and user advances and net revenue is recognized

                                                                                     112




120 of 341                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         ratably over the subscription period. This provides us with a cash flow benefit between the time we receive funds and when we need to pay termination
         costs associated with the delivery of billing minutes at which time net revenue is earned.

               The consummation of this offering will trigger cash payments to certain of our principal shareholders and their affiliates under management services
         agreements in aggregate amount of approximately $ million which become payable at the time of this offering. See “Certain Relationships and Related
         Party Transactions—Management Services Agreements.”

               Net cash provided by operating activities was $64.8 million in the six months ended June 30, 2010, primarily reflecting net income of $13.1 million
         during the period which included $79.2 million in depreciation and amortization and a realized loss of $13.5 million occurring upon the refinancing of the
         Five Year Credit Agreement, offset in part of deferred income tax benefits of $34.8 million recorded during the period. In addition, other changes in
         working capital balances resulted in a net decrease in cash of $15.2 million during this period primarily due to an increase in current assets, partially offset
         by an increase in deferred revenue and user advances.

               Net cash used in operating activities was $150.9 million in the Successor period from November 19, 2009 to December 31, 2009. Net cash used in
         operating activities was impacted by outgoing cash payments of $94.4 million in connection with the Joltid litigation settlement and net cash of $98.7
         million was paid as transaction costs in connection with the Skype Acquisition. The resolution of the Joltid litigation was funded in part by the
         indebtedness incurred as part of the Skype Acquisition. See “—Indebtedness” below. See “Certain Relationships and Related Party Transactions” and
         Note 13 to our audited consolidated financial statements included elsewhere in this prospectus.

               Net cash provided by operating activities was $128.0 million in the Predecessor period from January 1, 2009 to November 18, 2009. Although we
         generated a net loss of $269.1 million during this period, this included non-cash charges relating to depreciation and amortization of $60.6 million, the
         $241.2 million non-cash component of the Joltid litigation settlement and non-cash stock-based compensation expense of $14.5 million. In addition, other
         changes in working capital balances resulted in a net increase in cash of $75.7 million during this period.

               Net cash provided by operating activities was $148.8 million in the year ended December 31, 2008. We generated net income during the period of
         $41.6 million which included non-cash depreciation and amortization charges of $75.5 million and non-cash stock-based compensation charges of $12.8
         million. Other changes in working capital balances resulted in a net increase of net cash of $33.4 million during this period. These non-cash charges and
         increases as a result of changes in working capital were partially offset by deferred income tax benefits of $15.8 million recognized during this period.

               Net cash provided by operating activities was $80.2 million in the year ended December 31, 2007. Although we generated a net loss of $1,405.3
         million during this period, this included non-cash depreciation and amortization charges of $73.3 million, a non-cash impairment of goodwill of $1,391.9
         million, and non-cash stock-based compensation charges of $10.3 million. Other changes in working capital balances resulted in a net increase of $41.7
         million during this period. These effects were partially offset by deferred income tax benefits of $30.3 million recognized during this period.

               Cash paid for income taxes for the first six months of 2009 and 2010 was $0.2 million and $0.9 million, respectively. Cash paid for income taxes
         during the years ended December 31, 2007, 2008, the Predecessor period from January 1, 2009 to November 18, 2009 and the Successor period from
         November 19, 2009 to December 31, 2009 were $2.9 million, $3.3 million, $0.2 million and $0.3 million, respectively.

                                                                                       113




121 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Investing Activities
              Net cash used in investing activities was $12.9 million in the six months ended June 30, 2010, primarily due to the purchases of property and
         equipment.

               Net cash used in investing activities was $1,959.0 million in the Successor period from November 19, 2009 to December 31, 2009, primarily due to
         $1,916.6 million in cash paid to eBay as a portion of consideration in the Skype Acquisition. In addition, $34.6 million was paid to acquire intangible
         assets as part of the Joltid Transaction. See “Certain Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid
         Transaction.”

               Net cash used in investing activities was $11.7 million and $5.0 million in the Predecessor period from January 1, 2009 to November 18, 2009 and
         the year ended December 31, 2008, respectively, primarily due to the purchases of property and equipment.

              Net cash used in investing activities was $536.0 million in the year ended December 31, 2007, primarily due to a $530.3 million cash payment by
         eBay pursuant to an earn-out settlement agreement with certain former shareholders of the Pre-eBay Predecessor and the earn-out representative.

               Purchases of property and equipment, net totaled $11.2 million during the first six months of 2010, $5.3 million during the first six months of 2009,
         $11.7 million during the Predecessor period from January 1, 2009 to November 18, 2009, $1.8 million during the Successor period from November 19,
         2009 through December 31, 2009, $5.0 million in 2008 and $5.7 million in 2007. These purchases of property and equipment related primarily to
         purchases of computer equipment, leasehold improvements and software to support our operations.

         Financing Activities
               Net cash used in financing activities was $67.2 million in the six months ended June 30, 2010, primarily resulting from the refinancing of our
         Amended Five Year Credit Agreement and the contemporaneous repayment of the entire $125.0 million outstanding payment-in-kind loan agreement with
         eBay, as described below in “—Indebtedness.”

               Net cash provided by financing activities was $2,082.0 million in the Successor period from November 19, 2009 to December 31, 2009, primarily
         derived from $681.7 million net proceeds from indebtedness incurred in connection with the Skype Acquisition (see “—Indebtedness” below) and
         $1,428.0 million in net cash proceeds from the issuance of common stock in the Skype Acquisition.

               Net cash used in financing activities was $263.3 million in the Predecessor period from January 1, 2009 to November 18, 2009, primarily relating to
         the payment we made to eBay upon the conversion of our convertible preferred equity certificates in connection with the Skype Acquisition. See Note 2 to
         our consolidated financial statements for further information.

                Net cash provided by financing activities was $13.3 million in the year ended December 31, 2008, primarily resulting from the transfer of Skype
         Inc., an indirect wholly-owned subsidiary of Skype Holdings at the time, to eBay for cash consideration of $13.1 million.

               Net cash provided by financing activities was $468.4 million in the year ended December 31, 2007, primarily relating to a payment made by eBay
         pursuant to an earn-out settlement agreement with certain former shareholders of the Pre-eBay Predecessor and the earn-out representative.

         Cash and Cash Equivalents
               Reported cash and cash equivalents were negatively affected by currency exchange rates during the first six months of 2010 due to the weakening of
         the Euro against other currencies, primarily the U.S. dollar. The positive

                                                                                     114




122 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         effect of exchange rates on cash and cash equivalents in 2009 and in 2007 was due to primarily to the strengthening of the Euro against other currencies,
         primarily the U.S. dollar, and the impact on our Euro denominated cash accounts. The negative effect of exchange rates on cash and cash equivalents during
         2008 was due primarily to the weakening of the Euro against the U.S. dollar, and the impact on our Euro denominated cash accounts.

              At June 30, 2010, we had cash and cash equivalents of $85.5 million, compared to $114.1 million at December 31, 2009, $260.2 million at
         December 31, 2008 and $115.9 million at December 31, 2007. Substantially all cash and cash equivalents are held in accounts outside the United States
         predominantly in U.S. dollar and euro accounts and are short-term, highly liquid investments with original or remaining maturities of three months or less
         when purchased.

                We believe that our current levels of cash and cash equivalents and cash flows from operations, combined with the net proceeds to us from this
         offering, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need additional cash resources in the future
         if we experience changed business conditions or other developments. We also may need additional cash resources in the future if we find and wish to
         pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If we ever determine that our cash requirements exceed our
         amounts of cash and cash equivalents on hand, we may seek to issue debt or additional equity securities or obtain additional credit facilities. Any issuance
         of equity securities could cause dilution for our shareholders. Any incurrence of additional indebtedness could increase our debt service obligations and
         cause us to become subject to additional restrictive operating and financial covenants, and could require that we pledge collateral to secure those
         borrowings, if permitted to do so. It is possible that, when we need additional cash resources, financing will not be available to us in amounts or on terms
         that would be acceptable to us or at all.

         Indebtedness
               On November 19, 2009, we incurred $806.7 million of indebtedness to finance the Skype Acquisition, of which $681.7 million was the Five Year
         Credit Agreement and $125.0 million was a payment-in-kind loan agreement with eBay, each described in further detail below. On February 23, 2010, we
         amended the Five Year Credit Agreement and repaid the entire payment-in-kind loan agreement with eBay, as described more fully below. We have no
         other outstanding debt.

             Five Year Credit Agreement
                On November 19, 2009, our subsidiary Springboard Finance, L.L.C., entered into a five year credit agreement that includes a $30.0 million
         revolving commitment with a syndicate of financial institutions (the “Five Year Credit Agreement”). At issuance, the term loan bore a variable interest rate
         calculated on the basis of LIBOR, subject to a 2% floor, plus a margin of 7%. The net proceeds from the term loan were $681.7 million after an original
         issue discount of $18.3 million and before the payment of direct financing costs of $27.7 million and were used by us to fund the Skype Acquisition. The
         original issuance discount was recorded as an adjustment to the carrying value of the debt obligations and the direct financing costs, consisting primarily of
         legal and underwriting fees, were deferred and are presented as other non-current assets on the balance sheet as of December 31, 2009.

               Our obligations under the Five Year Credit Agreement are unconditionally guaranteed by Skype Global and certain of our subsidiaries. In addition,
         our obligations under the Five Year Credit Agreement are secured by pledges of all share capital held by Skype Global and certain of Skype Global’s
         subsidiaries, and by security interests in substantially all of the tangible and intangible assets of Skype Global and such subsidiaries (with certain
         exceptions, including deposit accounts, other bank or securities accounts and other assets already subject to security interests).

                                                                                      115




123 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

              As of December 31, 2009, we had $682.2 million outstanding under the Five Year Credit Agreement, of which $647.2 million and $35.0 million
         were classified as non-current and current liabilities, respectively, in our consolidated balance sheet. The amounts outstanding under the Five Year Credit
         Agreement are presented net of the unamortized original issue discount. The interest rate at December 31, 2009 was 9%. During the period from
         November 19 through December 31, 2009, we recognized an interest expense of $7.4 million on the Five Year Credit Agreement.

               On February 23, 2010, we entered into the First Amendment to the Five Year Credit Agreement (the “Amended Five Year Credit Agreement”) to
         provide for, among other things, new term loan borrowings of a total U.S. dollar-equivalent face amount of $775.0 million, a new syndicate of lenders and
         a decrease in the variable interest rate (due primarily to improved credit ratings). Pursuant to the Amended Five Year Credit Agreement, the term loan
         borrowings are comprised of (1) a tranche denominated in U.S. dollars in an aggregate principal amount of $591.3 million and (2) a tranche denominated
         in euros in an aggregate principal amount of €135.0 million. The Amended Five Year Credit Agreement is guaranteed by Skype Global and certain of our
         subsidiaries and secured by the same collateral as the original Five Year Credit Agreement. The Amended Five Year Credit Agreement matures on
         February 24, 2015.

               The variable interest rate is now calculated on the basis of LIBOR for the appropriate currency, subject to a 2% floor, plus 5% or 5.5% for the U.S.
         dollar and Euro tranches, respectively. The Amended Five Year Credit Agreement requires quarterly interest payments and non-uniform principal
         repayments on the term loan by us to the lenders through to February 23, 2015. On June 30, 2010, in accordance with the regularly scheduled amortization
         payment, we repaid $9.5 million of the principal amount of the term loan.

                Under our Amended Five Year Credit Agreement, we may be required to prepay our outstanding term loan in a number of circumstances, including if
         we receive net proceeds arising from the sale or transfer of assets and properties or the incurrence of additional indebtedness. In addition, after the end of
         each fiscal year, commencing with the fiscal year ending December 31, 2010, we will be required to prepay outstanding term loans with a percentage of
         our “excess cash flow,” calculated as set forth in our Amended Five Year Credit Agreement, if our leverage ratio exceeds pre-defined levels. If, as of the
         end of the relevant fiscal year, our leverage ratio is greater than or equal to 3:1, we will be required to prepay outstanding term loans in the aggregate
         amount of 50% of our excess cash flow. If, as of the end of the fiscal year, our leverage ratio is greater than or equal to 2.25:1 but less than 3:1, we will be
         required to prepay outstanding term loans in the aggregate amount of 25% of our excess cash flow. If our leverage ratio is less than 2.25:1 as of the end of
         the fiscal year, we will not be required to prepay outstanding term loans with excess cash flow for that year.

               We contributed the additional proceeds from the First Amendment to the repayment of the payment-in-kind loan from eBay (see “—eBay Payment-
         in-Kind Note” below). Due to the significant amendments to the Five Year Credit Agreement and changes in lenders, $242.5 million of the original $700.0
         million face amount term loan was considered to be partially extinguished. As a result, we recognized as a loss of $13.5 million in our consolidated
         statement of operations for the three months ended March 31, 2010. The original issue discount on the Amended Five Year Credit Agreement of $8.7
         million has been recorded as an adjustment to the carrying value of the debt obligation, and the direct financing costs on the Amended Five Year Credit
         Agreement of $2.3 million, consisting primarily of legal and underwriting fees, have been deferred. The original issue discount and the direct financing
         costs on the Amended Five Year Credit Agreement are recognized as amortization expense over the term of the loan by applying the effective interest rate
         method.

                The Amended Five Year Credit Agreement contains a number of covenants imposing restrictions on our business, including limitations, among other
         things, on our ability and the ability of our subsidiaries to:
                 •   incur additional indebtedness and incur or create liens;
                 •   consolidate, merge, liquidate or dissolve;
                 •   make investments, acquisitions, loans or advances;

                                                                                       116




124 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                   •       transfer and sell assets;
                   •       engage in sale and lease back transactions;
                   •       enter into swap, forward, future or derivative transactions;
                   •       pay dividends or make other distributions on, redeem or repurchase equity interests, including our ADSs or ordinary shares, or make payments
                           on junior financing; and
                   •       engage into transactions with affiliates.

              In addition, our Amended Five Year Credit Agreement requires us to meet certain financial ratio tests. Under the covenants in the Amended Five
         Year Credit Agreement, the leverage ratio must be below a specified amount as of a given date, and the interest coverage ratio must be above a specified
         amount for a given period. The table below summarizes the definition of the ratios and the required levels of the financial ratio tests set forth in the
         Amended Five Year Credit Agreement for each relevant period.

         Financial Ratio                                                            Definition                                      Required Level                                         Period
         Leverage ratio                                           Ratio of (i) consolidated total                    Equal to or less than:
                                                                                                                                                                        For periods ending:
                                                                  debt(1) to                                         •5.00 : 1.00
                                                                                                                                                                        •January 1, 2010 to December 31,
                                                                  (ii) consolidated EBITDA, as
                                                                                                                     •4.75 : 1.00                                          2010
                                                                  defined, for the four fiscal quarters
                                                                                                                                                                        •January 1, 2011 to March 31,
                                                                  then ended
                                                                                                                     •4.50 : 1.00                                          2011
                                                                                                                                                                        •April 1, 2011 to June 30, 2011
                                                                                                                     •4.25 : 1.00                                       •July 1, 2011 to September 30,
                                                                                                                                                                           2011
                                                                                                                     •4.00 : 1.00                                       •October 1, 2011 to December
                                                                                                                                                                           31, 2011
                                                                                                                     •3.50 : 1.00                                       •Thereafter
         Interest coverage ratio                                  Ratio of (i) consolidated EBITDA,                  Equal to or greater than:                          For periods ending:
                                                                  as defined for the four fiscal                     •1.85 : 1.00                                       •January 1, 2010 to September
                                                                  quarters then ended to (ii)                                                                              30, 2010
                                                                  consolidated cash interest expense                 •2.00 : 1.00                                       •October 1, 2010 to December
                                                                  for the same periods                                                                                     31, 2011
                                                                                                                     •2.25 : 1.00                                       •Thereafter
         (1)   Total debt under our Amended Five Year Credit Agreement on a given day is defined to be the aggregate principal amount of our indebtedness as of such day, plus the net aggregate losses under foreign
               exchange hedges relating to the Amended Five Year Credit Agreement as of such day, minus the aggregate amount of our unrestricted cash (as defined in the agreement) as of such day, except that
               such unrestricted cash shall not exceed 33% of consolidated EBITDA, as defined for the period ending on such date.

                As of June 30, 2010, our leverage ratio and interest coverage ratio were 2.4 and 6.7, respectively. See the Five Year Credit Agreement and the
         Amended Five Year Credit Agreement, each filed as an exhibit to the registration statement of which this prospectus forms part for a complete description
         of the leverage ratio and interest coverage ratio described above. We have been in compliance with our financial covenant requirements since we incurred
         this indebtedness.

                The breach of any of these restrictions, covenants or prepayment requirements could result in a default under our Amended Five Year Credit
         Agreement. On occurrence of an event of default, the loans may be accelerated and declared due and payable immediately, and the lenders would be
         entitled to take possession of and sell the assets we have pledged as collateral and to apply the proceeds from those sales to repay loans and other amounts
         due under the Amended Five Year Credit Agreement. See “Risk Factors—Risk Related to Our Business—Our credit agreement imposes significant
         restrictions on our business.”

                                                                                                            117




125 of 341                                                                                                                                                                                              8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                     http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               eBay Payment-in-Kind Note
               In connection with the Skype Acquisition, we entered into a payment-in-kind loan agreement with eBay with a face value of $125.0 million. The note
         accrued interest at 12%, and both principal and interest were to become payable on November 19, 2015. On February 23, 2010, we repaid the entire
         outstanding payment-in-kind loan plus accrued and unpaid interest of $4.0 million, and the loan is no longer outstanding.

         Debt maturity
                  The following table sets forth the maturities of our outstanding debt as of December 31, 2009 and June 30, 2010:

                                                                                                                                                                                         As of June 30,
                                                                                                                                   As of December 31, 2009                                  2010 (1)
                                                                                                                                                   (thousands of U.S. dollars)
                          Fiscal Year:
                          2010                                                                                                     $                  35,000                             $      18,903
                          2011                                                                                                                        70,000                                    37,805
                          2012                                                                                                                        70,000                                    37,805
                          2013                                                                                                                       175,000                                    66,159
                          2014                                                                                                                       350,000                                   444,213
                          Thereafter                                                                                                                 125,000                                   141,771
                                                                                                                                                     825,000                                   746,656
                          Less: Unamortized original issuance discount                                                                               (17,780)                                  (18,744)
                                                                                                                                   $                 807,220                             $     727,912
         (1)    Total debt outstanding as of June 30, 2010 consisted of $583.9 million denominated in U.S. dollars and €133.3 million denominated in euro (equivalent to $162.7 million). Total long-term debt outstanding of
                $727.9 (including current portion of $37.8 million) million on the consolidated balance sheet as of June 30, 2010 is net of the unamortized portion of the original issuance discount costs of $18.7 million.


         Capital Expenditures
                As a result of the low infrastructure requirements of our software communications solution, we have been able to invest significantly in our business.
         As part of our separation from eBay, we are investing substantial amounts in a new SAP ERP system, for internal reporting and other control processes,
         and a Human Resources system to help us systematically attract, develop and manage our workforce. We are also investing to provide new office
         infrastructure to support our growth. Overall, our capital expenditures of $11.2 million in the first half of 2010 represented an increase of 113% over the
         capital expenditures in the same period a year ago, and we expect this investment will result in a stronger and more stable business organization. In 2007,
         2008 and 2009, our capital expenditures totaled $5.7 million, $5.0 million and $13.5 million, respectively. Our capital expenditures primarily consisted of
         IT infrastructure, computer equipment and costs incurred in relation to facilities. For the year ending December 31, 2010, we have budgeted $37 million of
         capital expenditure.

                                                                                                                 118




126 of 341                                                                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                 http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Commitments and Contingencies
                We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our
         business needs, contractual cancellation provisions, fluctuating interest rates, and other factors may result in actual payments differing from the estimates.
         Although certain payments occur on a fixed schedule (see “—Indebtedness”), we cannot provide certainty regarding the timing and amounts of all of these
         payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the table in order to
         assist in the review of this information within the context of our consolidated financial position and results of operations. The following table summarizes
         our fixed contractual obligations and commitments (in thousands), as of December 31, 2009:

                                                                                                                                                           Contractual Obligations
                                                                                                                                                  Less than                                              More than
                                                                                                                                 Total             1 Year        1 - 3 Years       3 - 5 Years            5 Years
                                                                                                                                                         (thousands of U.S. dollars)
         Long-term Debt Obligations(1)                                                                                           825,000            35,000            140,000            525,000           125,000
         Operating Lease Obligations(2)                                                                                           22,953             6,269              7,917              5,634             3,133
         Purchase Obligations(3)                                                                                                   5,841             5,841                —                  —                 —
         Interest Obligations(4)                                                                                                 387,721            63,037            115,710             79,737           129,237
         Total Contractual Obligations                                                                                         1,241,515           110,147            263,627            610,371           257,370
         (1)   Comprises our Amended Five Year Credit Agreement and the $125 million payment-in-kind note, the latter of which was fully repaid in February 2010. See “—Indebtedness” for more details of our
               long-term debt obligations. See “—Debt maturity” above for details of our long-term debt obligations as of June 30, 2010. Since June 30, 2010, we have not made any payment to any of our long-term
               debt obligations.
         (2)   We lease office facilities and equipment under various operating leases.
         (3)   Non-cancellable outstanding purchase orders.
         (4)   These amounts are an estimate of future interest payments due on our long-term debt outstanding as of December 31, 2009. At such time, the Five Year Credit Agreement bore interest at a rate of
               LIBOR plus 7%, subject to a 2% floor, which was calculated was calculated as 9% as of December 31, 2010. The $125.0 million eBay payment-in-kind note had a fixed 12% interest rate.

                Operating lease amounts include minimum rental payments under our non-cancelable operating leases for office facilities, hosting equipment and
         facilities and limited computer and office equipment that we utilize under lease arrangements. The amounts presented are consistent with contractual terms
         and are not expected to differ significantly, unless a substantial change in our headcount needs requires us to expand our occupied space or exit an office
         facility early.

               Purchase obligation amounts include minimum purchase commitments for advertising, capital expenditures (computer equipment, software
         applications and contractor services) and other goods and services that were entered into through our ordinary course of business. These estimates have
         been developed based upon historical trends, when available, and our anticipated future obligations. Given the significance of such performance
         requirements within our advertising and other arrangements, actual payments could differ significantly from these estimates.

               We are unable to reasonably predict the timing of settlement of liabilities related to unrecognized tax benefits. The table does not include $2.2
         million of such non-current liabilities recorded on our consolidated balance sheet as of December 31, 2009.

               An agreement was reached in connection with the Joltid Transaction requiring us to commit $10 million to Atomico, a venture capital fund. See
         “Certain Relationships and Related Party Transactions—Acquisition-Related Matters—The Joltid Transaction.” Payments are made into the venture
         capital fund as capital calls notices are received. As of June 30, 2010, we have contributed $1.7 million towards investments made by the fund and have
         paid management administration and set-up fees of $0.7 million resulting in a future commitment to pay approximately $7.6 million when additional capital
         notices are received. We are unable to reasonably predict the timing of future capital calls and therefore the table above does not reflect these
         commitments.

                                                                                                             119




127 of 341                                                                                                                                                                                               8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                In the second quarter of 2010, we entered into a cash flow hedge program to hedge our exposure to a portion of our euro-denominated cash flows
         resulting from euro-denominated revenues earned from our customers. We entered into twelve forward currency contracts with durations ranging from one
         to twelve months. The average size of the trades was €4.0 million (or $4.8 million) per month.

               The consummation of any initial public offering, such as this offering, will trigger payments under management services agreements entered into in
         connection with the Skype Acquisition in aggregate amount of $           million. See “Certain Relationships and Related Party Transactions—Management
         Services Agreements.”

         Off-Balance Sheet Arrangements
              As of June 30, 2010, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our
         consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

         Indemnification Provisions
               In the ordinary course of business, we have included limited indemnification provisions in certain of our agreements with parties with whom we
         have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these
         contracts, we generally indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in
         connection with claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are
         applicable to our performance under the subject agreement. In a limited number of agreements, we have provided an indemnity for other types of
         third-party claims, which are indemnities mainly related to various intellectual property rights. It is not possible to determine the maximum potential loss
         under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each
         particular provision. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification
         provisions. In addition, we have agreed to indemnify the underwriters of this offering.

         Critical Accounting Policies, Judgments and Estimates

         General
                The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the
         reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on
         historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
         making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
         estimates under different assumptions or conditions.

                An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly
         uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are
         reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe the following critical accounting
         policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. The following descriptions
         of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures
         included in this prospectus.

                                                                                      120




128 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                             http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               All accounting policies in effect for Skype Global S.à r.l. and described in this prospectus will remain in effect upon completion of the corporate
         reorganization and will be utilized by Skype S.A.

         Legal Contingencies
                In connection with certain pending litigation and other claims, we have estimated the range of probable loss and provided for such losses through
         charges to our consolidated statement of operations. We record an estimated loss from a claim or loss contingency when information available prior to
         issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial
         statements and the amount of the loss can be reasonably estimated. If we determine that it is reasonably possible but not probable that an asset has been
         impaired or a liability has been incurred, or if the amount of a probable loss cannot be reasonably estimated, then we disclose the amount or range of
         estimated loss if the amount or range of estimated loss is material. These estimates have been based on our assessment of the facts and circumstances at
         each balance sheet date and are subject to change based upon new information and future events. We consult with legal counsel on issues related to
         litigation and seek input from other experts and advisors with respect to matters in the ordinary course of business, however the outcome of litigation is
         difficult to estimate and such estimates require significant subjective judgments.

               From time to time, we are involved in disputes that arise in the ordinary course of business. Some of these legal proceedings are discussed under
         “Risk Factors” and “Business—Legal Proceedings,” and we intend to defend ourselves vigorously in these proceedings. However, even if successful, our
         defense against certain actions will be costly and could divert our management’s time. If the plaintiffs were to prevail on certain claims, we might be
         forced to pay significant damages and licensing fees, modify our business practices or even be prohibited from conducting a significant part of our
         business. Any such results could materially harm our business and could result in a material adverse impact on our results of operations or financial
         position or cash flows.

         Accounting for Income Taxes
                We account for income taxes on a separate returns basis and follow an asset and liability approach, which requires the recognition of taxes payable
         or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial
         statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future
         changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets are reduced by the amount of any tax benefits that are
         not expected to be realized based on available evidence.

                  In most tax jurisdictions, our subsidiaries file tax returns as stand-alone entities and the provision for income taxes is completed on a separate return
         basis.

               We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize
         interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

               At June 30, 2010, we had a valuation allowance on certain foreign net operating losses based on our assessment that it is more likely than not that the
         deferred tax asset will not be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a
         corresponding increase or decrease in our tax provision in our consolidated statement of operations or against additional paid-in-capital in our
         consolidated balance sheet to the extent any tax benefits would have otherwise been allocated to equity.

               We believe these provisions have adequately provided for our income tax liabilities. Our future effective tax rates could be adversely affected by
         earnings being lower than anticipated in countries where we have lower

                                                                                         121




129 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuations of our deferred tax assets or
         liabilities, or by changes or interpretations in tax laws, regulations or accounting principles. In addition, we are subject to the continuous examination of
         our income tax returns by various foreign tax authorities in the jurisdictions in which we operate. We regularly assess the likelihood of adverse outcomes
         resulting from these examinations to determine the adequacy of our provision for income taxes.

                We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is
         audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we
         believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest, in light of changing
         facts and circumstances. Settlement of any particular position could require the use of cash.

         Revenue Recognition
               We recognize revenue when there is persuasive evidence of an arrangement, delivery of products has occurred or services have been rendered, the
         fees are fixed or determinable and collection is reasonably assured.

               We license our Skype software product and provide software updates to our users free of charge. Accordingly, no revenue is derived from the
         licensing of these software products to users.

               We earn revenues primarily from the sale of our premium Internet communications services products. Our SkypeOut product, which generates a
         majority of our revenue, allows our users to place Internet voice calls from our Skype software application to traditional fixed line or mobile networks.
         Other premium Internet communications services products include SkypeIn, which allows our users to receive incoming calls to our Skype software
         application from traditional fixed lines or mobile networks, Skype Access which allows our users to connect to WiFi hotspots through our Skype software
         application, voicemail and SMS text messaging. These products are collectively referred to as our “communications services.” Our fees for
         communications services products are primarily charged on a pay-as-you-go or subscription basis.

                Our users can purchase prepaid credit which is recorded as deferred revenue and user advances when collected and recognized as net revenue at the
         time users use the credit. For example, when a user makes a pay-as-you-go call or uses another pay-as-you-go communication product, the cost of the call
         or other product is charged against the user’s prepaid credit balance and net revenue is recognized at the time of use. In addition, any prepaid calling credit
         that remains in a user’s account for more than 180 days after the last transaction charged against that account is made inactive. Users may subsequently
         reactivate their credit for an indefinite period by accessing their account through our website. We recognize revenue on inactive credit by applying the
         delayed recognition approach, which requires management to estimate the point at which it becomes remote that a user will reactivate their credit. These
         estimates are derived based on historical Company-specific data analyzing user behavior, including their likelihood of returning to Skype after 180 days of
         inactivity, and the volume of users that have reclaimed an inactive credit. Prior to January 1, 2010, any prepaid calling credit that remained in a user’s
         account for more than 180 days after the last transaction charged against that account was forfeited to us by the user and recognized as revenue at that date.

               When a customer purchases a subscription to use our other paid-products over a specified period, the amount collected is initially recorded as
         deferred revenue and customer advances and net revenue is recognized ratably over the subscription period.

               Users can purchase certain subscription products that may contain multiple deliverables such as an unlimited Internet calling plan, voicemail, or a
         discounted online number for a specified period. When these subscription products are bundled, the deliverables are generally available over a
         commensurate subscription period and revenue is recognized ratably over the period of the subscription. If products are sold separately by the Company,
         the revenue recognized from these products are determined based on their stand-alone selling price. When a product is not sold separately, the Company
         establishes its best estimate of the selling price for

                                                                                      122




130 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         that deliverable and revenue is allocated to each communication product using the relative selling price method. In accounting for multiple deliverables,
         management’s judgment is necessary when identifying the nature of deliverables in an arrangement as well as determining each individual deliverable’s
         selling price and allocating relative selling price to the multiple deliverables. Prior to January 1, 2010, we applied the residual method for allocating
         revenue to products for which we could not establish objective evidence of fair value. Application of the relative selling price method did not have a
         material impact on our consolidated financial statements when applied prospectively in 2010.

                We enter into a limited number of arrangements whereby the software that enables our products is licensed for a fee to manufacturers or retailers of
         hardware devices. Under these arrangements, we allocate and defer net revenue for the undelivered elements based on their vendor-specific objective
         evidence of fair value (which we refer to as “VSOE”). VSOE is the price charged when an element in the arrangement is sold separately. If VSOE does not
         exist for undelivered elements that are specified products or features, we defer all net revenue until the earlier of the delivery of all elements or the point at
         which VSOE can be determined for each of the undelivered elements. These amounts are not currently significant to our overall results of operations.

                Other net revenue is derived from arrangements that provide for the distribution of third-party offerings during the Skype software download process
         and royalty arrangements whereby we receive payments for the licensing of the Skype brand and other Skype features to partners. We also have an online
         store that allows users to purchase hardware products from third party vendors, who pay us a referral fee either when the user clicks through to the
         vendor’s website or buys a product from the vendor based on a referral from our website. Net revenues earned from referral fees is recognized on a net
         basis in our statement of operations and is not currently significant to our overall results of operations.

         Goodwill and Intangible Assets
               The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the
         residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and
         estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted
         average cost of capital.

               At June 30, 2010, our goodwill totaled $2.4 billion and our identifiable net intangible assets totaled $712.9 million. We assess the impairment of
         goodwill annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. We evaluate impairment of
         goodwill using a two-step process. The first step involves a comparison of the fair value of the Company with its carrying amount. If the carrying amount of
         the Company exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying amount of the goodwill of the
         Company. If the carrying amount of the goodwill of the Company exceeds the fair value of that goodwill we would recognize an impairment loss in an
         amount equal to the excess of carrying value over fair value. If an event occurs that would cause us to revise our estimates and assumptions used in
         analyzing the value of our goodwill the revision could result in a non-cash impairment charge that could have a material impact on our financial results.
         This assessment is conducted using the income approach, which requires estimates of future cash flows based upon, among other things, certain
         assumptions about expected future operating performance and an appropriate discount rate determined by our management. Our estimates of discounted
         cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to our business model or changes in operating
         performance. Additionally, our business has a limited financial history and developing revenue model, which makes it difficult to estimate future cash flow
         and increases the risk of differences between our projected and actual performance. Significant differences between these estimates and actual cash flows
         could materially affect our future financial results. These factors increase the risk of differences between projected and actual performance that could
         impact future estimates of fair value.

               We conducted our annual impairment test of goodwill as of August 31, 2009 and as of August 31, 2008 and determined that no adjustment to the
         carrying value of goodwill was required. In 2007, our annual impairment

                                                                                        123




131 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         test of goodwill was conducted as of August 31, 2007 at which time we concluded that the carrying value of goodwill exceeded its fair value and recorded
         an impairment charge of $1.4 billion during the year ended December 31, 2007.

         Share-Based Compensation
               During the Predecessor period, our employees were granted equity-based compensation awards under eBay’s equity incentive plans for directors,
         officers and employees that were comprised of options to purchase eBay’s common stock, restricted stock units settled in eBay’s common stock and
         non-vested shares of eBay’s common stock. Our employees were also eligible to participate in eBay’s employee stock purchase plan.

               The expenses relating to these awards have been reflected in our combined financial statements for the Predecessor period. Stock options granted to
         our employees under these plans generally vested 25% one year from the date of grant (or 12.5% six months from the date of grant for grants to existing
         employees) and the remainder vested at a rate of 2.08% per month thereafter, and generally expired seven to ten years from the date of grant. Restricted
         stock units and non-vested shares granted to our employees under these plans vested on an annual basis over two to four years, were subject to the
         employees’ continuing service to eBay or its majority-owned subsidiaries (including the Skype Companies at the time) and did not have an expiration date.
         The expense relating to stock options was determined using the fair value estimated by the Black-Scholes option pricing model on the date of grant and the
         expense relating to awards of restricted stock units and non-vested shares was determined using the fair value of eBay’s common stock on the date of grant.

               The fair value of stock options granted under eBay’s equity initiative plans was calculated on the date of grant using the Black-Scholes option
         pricing model. The following weighted-average assumptions were used for each respective period:

                                                                                                                     Predecessor
                                                                                                                                                 Period from
                                                                                        Year Ended                   Year Ended               January 1, 2009 to
                                                                                     December 31, 2007            December 31, 2008           November 18, 2009
               Risk-free interest rates                                                          4.5%                        2.3%                         1.8%
               Expected life                                                                 3.5 years                   3.8 years                    3.8 years
               Dividend yield                                                                      0%                          0%                           0%
               Expected volatility                                                                37%                         34%                       44.8%

                The computation of expected volatility was based on a combination of historical and market-based implied volatility from traded options on eBay
         stock. The computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of
         the stock-based awards, vesting schedules and expectations of future employee behavior. The interest rate for periods within the contractual life of the
         award was based on the U.S. Treasury yield curve in effect at the time of grant.

               The stock-based compensation expense for awards under eBay’s equity incentive plans was recognized over their respective vesting period. As of
         November 19, 2009, all unvested awards were cancelled with the exception of a limited number of awards for which vesting was accelerated. The
         modifications to these limited number of awards resulted in stock-based compensation expense of $6.5 million during the Predecessor period. Following
         the Skype Acquisition, there was no unearned stock-based compensation relating to awards granted under the eBay equity incentive plans.

               Subsequent to the Skype Acquisition, our board of directors approved the Skype Equity Incentive Plan whereby employees have been granted
         options to purchase ordinary shares of the Company. Under the Skype Equity Incentive Plan, certain options vest based on the continued employment of
         participants, referred to as “time-based stock options”, and other options vest based on the achievement of certain performance and market conditions,
         referred to as “performance-based stock options”. For time-based stock options, we have estimated

                                                                                     124




132 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         the grant date fair value method using the Black-Scholes valuation model. For performance-based stock options, we have estimated grant date fair value
         method using a Monte Carlo simulation model. This method assumes that our stock price will follow geometric Brownian motion and requires complex
         calculations and subjective assumptions to determine the fair value of an option.

               The fair value of stock options granted under the Skype Equity Incentive Plan was calculated on the date of grant using the following weighted-
         average assumptions:

                                                                                                                              Successor
                                                                                                          Period from
                                                                                                      November 19, 2009 to                Period from January 1,
                                                                                                       December 31, 2009                  2010 to June 30, 2010
                     Risk-free interest rates                                                                       3.1%                                 3.2%
                     Time-based stock options expected life                                                     6.3 years                            6.2 years
                     Dividend yield                                                                                 0.0%                                 0.0%
                     Expected volatility                                                                          64.0%                                65.0%

               The inputs required in using the Black-Scholes and Monte Carlo option pricing models include the risk-free interest rate, expected life of time-based
         stock options, expected dividend yield and expected volatility. These inputs are subjective and require significant judgment to be applied by management.

               Due to the absence of trading history on our common stock, the computation of expected volatility was derived by referencing the implied historical
         volatility of several publicly traded entities that operate in the Internet or technology industries. In selecting companies to calculate implied volatility, we
         considered revenue, profitability and growth to determine companies that were sufficiently comparable to the Company.

                The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve applicable to the expected
         life of the option at the time of grant. Due to the absence of sufficient historical data on exercise behavior, the computation of expected life for the options
         was determined after considering a number of factors including lives estimated using the simplified method and review of peer data adjusted for company
         specific factors.

               We have recognized compensation expense on the time-based stock options that are ultimately expected to vest solely based on the continued
         employment of the participants on a straight-line amortization method over the requisite service period. Accordingly, stock-based compensation has been
         reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors, trends of actual award forfeitures and other
         events that will result in forfeiture of awards. The impact of estimated forfeitures for the period from November 19, 2009 to December 31, 2009 and
         January 1, 2010 to June 30, 2010 has not been material to the charges for share-based compensation.

               As the performance-based stock options can vest only upon a liquidity event, certain scenarios were modeled separately based on estimates around
         the probability and timing of a qualifying liquidity event. Potential stock prices are simulated between the grant date and the potential qualifying liquidity
         events. The average value across all such simulated paths is the value of the performance-based stock option for a given liquidity event, and the final fair
         value that has been determined by a probability weighted scenario analysis. This methodology requires management to exercise significant judgment to
         estimate possible liquidity scenarios that may result in the vesting of performance-based stock options.

               We recognize compensation expense when it becomes probable that a performance condition will occur. Since the occurrence of a liquidity event
         that will trigger the eligibility of vesting for performance-based stock options is outside of the control of the Company or the optionholders, compensation
         expense related to performance-based stock options will be recognized only when a liquidity event actually occurs based on the number of shares that
         become eligible for vesting.

                                                                                       125




133 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               We have only operated as a stand-alone company since November 19, 2009 and have granted options under the Skype Equity Incentive Plan from
         December 17, 2009. As we accumulate additional Skype specific employee behavioral data over time and incorporate market data related to our common
         stock subsequent to this offering, our estimates of forfeiture rates, stock price volatility and expected life of options may change and materially impact the
         valuation of awards granted under the Skype Equity Incentive Plan and the stock-based compensation expense that we recognize in future periods.

             Pre-IPO Valuation of Common Stock
               During the periods from November 19, 2009 through June 30, 2010, we granted options to purchase shares in our common stock prior to this offering
         with exercise prices as follows:

                                                                    Time-Based            Performance-Based       Exercise Price       Fair Value of         Grant Fair
         Grant Date                                                Options Granted         Options Granted          Per Share         Common Stock             Value
                                                                                                                                       (U.S. dollars)
         December 17, 2009                                               182,669                   138,967        $     255.52        $     233.82         $39,222,042
         February 22, 2010                                                34,520                    51,781              255.52              233.82          10,172,980
         April 26, 2010                                                   25,683                    27,591              255.52              250.75           6,937,433
         June 10, 2010                                                    33,343                    39,949              255.52              250.75           9,492,716

               In setting the exercise price of options, our board of directors used the higher of the consideration exchanged in the Skype Acquisition or the
         estimated fair value of our stock based upon contemporaneous valuations performed, as discussed below.

               We perform a contemporaneous valuation of our ordinary shares at the beginning of each fiscal quarter to assist in the determination of the fair value
         for options granted during the quarter. Given the absence of an active market for our ordinary shares, we estimated the fair value of our ordinary shares for
         purposes of determining share-based compensation expense for the periods presented. From December 2009 to February 2010, we estimated the fair value
         of our common stock by reference to the consideration exchanged in the Skype Acquisition adjusted for the impact of transaction costs. Beginning in April
         2010, valuations have been prepared using the market-comparable approach and income approach to estimate the aggregate enterprise value. These
         valuations were based in part on an analysis of relevant metrics, including the following:
                 •    the level of operational risk and uncertainty surrounding our stand-alone cost structure;
                 •    the range of market multiples of comparable companies;
                 •    our financial position, historical operating results and expected growth in operations;
                 •    the fact that the option grants involve illiquid securities in a private company; and
                 •    the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company given prevailing market conditions.

                The market-comparable approach indicates the fair value of a business based on a comparison of the subject company to comparable firms in similar
         lines of business that are publicly traded or which are part of a public or private transaction, as well as prior subject company transactions. Each
         comparable company was selected based on various factors, including, but not limited to, industry similarity, financial risk, company size, geographic
         diversification, profitability, adequate financial data and an actively traded stock price.

                The income approach is a valuation technique that provides an estimation of the fair value of a business based on the cash flows that a business can
         be expected to generate over its remaining life. This approach begins with an estimation of the annual cash flows an investor would expect the subject
         business to generate over a discrete projection period. The estimated cash flows for each of the years in the discrete projection periods are then converted
         to their present value equivalent using a rate of return appropriate for the risk of achieving the

                                                                                        126




134 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         business’ projected cash flows. The present value of the estimated cash flows are then added to the present value equivalent of the residual value of the
         business at the end of the discrete projection period to arrive at an estimate of the fair value of the business enterprise.

               We prepared a financial forecast for each valuation to be used in the computation of the enterprise value for both the market-comparable approach
         and the income approach. The financial forecasts took into account past experience and future expectations. There is inherent uncertainty in these estimates.

         Recent Accounting Pronouncements
                In June 2009, the FASB issued new accounting guidance which amends the evaluation criteria to identify the primary beneficiary of a variable
         interest entity (“VIE”) and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance significantly
         changes the consolidation rules for VIEs. Affected areas include the consolidation of common structures, such as joint ventures, equity method investments
         and collaboration arrangements. The guidance is applicable to all new and existing VIEs. The provisions of this new accounting guidance is effective for
         interim and annual reporting periods ending after November 15, 2009 and became effective for us beginning in the first quarter of 2010. The application of
         this accounting guidance did not have a material impact on our consolidated financial statements.

               In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new
         guidance states that if vendor specific objective evidence or third-party evidence for deliverables in an arrangement cannot be determined, companies will
         be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price
         method. We adopted this standard prospectively on January 1, 2010. Under this standard, we allocate revenue in arrangements with multiple deliverables
         using estimated selling prices if we do not have vendor-specific objective evidence or third-party evidence of the selling prices of the deliverables.
         Estimated selling prices are management’s best estimates of the prices that we would charge our customers if we were to sell the standalone elements
         separately. Application of the relative selling price method did not have a material impact on our consolidated financial statements when applied
         prospectively in 2010.

                In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements that include software elements. Previously,
         companies that sold tangible products with “more than incidental” software were required to apply the software revenue recognition guidance. This
         guidance often delayed revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software
         components that are “essential to the functionality” of the tangible product will be scoped out of the software revenue recognition guidance. The new
         guidance will include factors to help companies determine what is “essential to the functionality.” Software-enabled products will now be subject to other
         revenue guidance and will likely follow the guidance for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is
         to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with
         earlier application permitted. The adoption of this accounting guidance is not expected to have any significant impact on our consolidated financial
         statements.

                In January 2010, the FASB issued new accounting guidance related to the disclosure requirements for fair value measurements and provides
         clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant
         transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales,
         issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value
         measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of
         disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to
         measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of
         existing disclosure are effective for fiscal years beginning after

                                                                                       127




135 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         December 15, 2009, except for the disclosure requirements for related to the purchases, sales, issuances and settlements in the roll forward activity of
         Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. We do not believe the
         adoption of this guidance will have a material impact to our consolidated financial statements.

         Quantitative and Qualitative Disclosures about Market Risk
         Interest Rate Risk
               We had cash and cash equivalents totaling $85.5 million as of June 30, 2010. These amounts are held in current or short-term investment accounts
         and are held for working capital purposes. Although a decline in interest rates would reduce future interest income, we do not believe this would have a
         material impact on our financial statements.

               As of June 30, 2010, we had $727.9 million outstanding under our Amended Five Year Credit Agreement, as amended, of which $567.5 million is
         denominated in U.S. dollars and $160.4 million is denominated in euro. The term loan under the Amended Five Year Credit Agreement, as amended, bears
         a variable interest rate calculated on the basis of LIBOR, subject to a 2% floor, plus 5% or 5.5% for the U.S. dollar and Euro tranches, respectively. The
         interest rates at June 30, 2010 were 7% and 7.5% for the U.S. dollar and Euro tranches, respectively. If the LIBOR rate increases above 2%, we will incur
         additional interest expense. A 1.0% increase in interest rates at June 30, 2010 would not have increased the annual interest expense on our Amended Five
         Year Credit Agreement as a result of the 2% LIBOR floor in effect under the agreement. See “—Indebtedness—Five Year Credit Agreement.”

         Foreign Currency Exposures
                Our users, customers and vendors are located in countries around the world, and we receive and make payments in a wide range of currencies.
         Accordingly, changes in currency exchange rates may substantially affect our results of operations and financial condition in ways that are unrelated to our
         operating performance. As exchange rates may fluctuate significantly between periods, revenues and operating expenses, when translated into U.S. dollars,
         our reporting currency, may also experience significant fluctuations between periods. If the U.S. dollar weakens against foreign currencies, the translation
         of these foreign currency denominated transactions will result in increased net revenues and operating expenses. Conversely, if the U.S. dollar strengthens
         against foreign currencies, the translation of these foreign currency denominated transactions will result in decreased net revenues and operating expenses.
         Historically, a majority of our revenues, cost of net revenues and operating expenses have been denominated in U.S. dollars and in euro. In addition, the
         currency in which we pay call termination charges to deliver our SkypeOut product often differs from the currency in which we generate net revenues.
         Although we are impacted by the exchange rate movements from a number of currencies relative to the U.S. dollar, our results of operations are
         particularly impacted by fluctuations in the U.S. dollar-euro exchange rate. For example, as the U.S. dollar strengthens against the euro, our net revenues
         earned in euro may decrease and our cost of net revenues may remain consistent or increase, causing gross margin to shrink.

                In addition, our users are currently able to purchase prepaid Skype credit and maintain these balances in 15 unique currencies. The remeasurement of
         these foreign denominated user advances into U.S. dollars at the prevailing exchange rate at each balance sheet date results in foreign currency gains or
         losses depending on the movement in exchange rates between periods. If the U.S. dollar weakens against these foreign denominated currency user
         advances, the respective liability balances increase, giving rise to foreign currency exchange losses. Conversely, if the U.S. dollar strengthens against user
         advances held in foreign denominated currencies, the respective liability balances decrease, giving rise to foreign currency exchange gains. We cannot
         predict the impact that fluctuations in the exchange rate between our functional and reporting currencies will have on the reported amounts in net revenues,
         cost of net revenues and operating expenses in our Statement of Operations.

                                                                                      128




136 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               A majority of our revenue is earned in Luxembourg, but we allow our users to conduct transactions in a number of currencies. Additionally, the
         expenses of our foreign operations are typically denominated in the local currency of each relevant country, which is primarily the euro, the British pound
         and the Estonian Kroon. Our operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions,
         changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results
         could be materially adversely impacted by changes in these or other factors.

                Prior to the Skype Acquisition, the risks relating to fluctuations in foreign currency rates and other economic exposures were addressed by eBay at
         its consolidated group level, and we did not hedge our exposure to foreign currency fluctuations. We only recently implemented a foreign currency hedging
         program to mitigate a portion of the volatility that we experience from the multitude of currencies in which we operate and a significant amount of our
         operations remain subject to the normal uncertainties that occur due to changes in foreign currency exchange rates.

               Under our hedging program, we utilize foreign exchange forward contracts to mitigate certain portions of the risk of changes in value of euro to our
         cash flows. We do not enter into derivatives for speculative or trading purposes. As of June 30, 2010, we held foreign currency derivatives with an
         aggregate notional amount of €48.0 million and a weighted average maturity date of approximately six months. See Note 9 to our condensed consolidated
         financial statements as of June 30, 2010 included elsewhere in this prospectus for further information on our derivatives and risk management strategies.
         All cash flows resulting from our derivative contracts are expected to occur within twelve months.

                We are impacted by the exchange rate movements of a number of currencies relative to the U.S. dollar. A hypothetical uniform 20% strengthening,
         which we believe to be reasonably possible between periods based on recent fluctuations in exchange rates, in the value of the U.S. dollar relative to
         foreign currency denominated monetary assets and liabilities would have resulted in an adverse impact on income before income taxes of approximately
         $28.7 million and $52.0 million at December 31, 2009 and June 30, 2010, respectively. There are inherent limitations in the sensitivity analysis presented,
         due primarily to the assumption that foreign exchange rate movements are linear and instantaneous. As a result, the analysis is unable to reflect the potential
         effects of more complex market changes that could arise, which may positively or negatively affect income.

                                                                                        129




137 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                                                                                 BUSINESS
                                                                            Company Overview

                Skype is a global technology leader that enables real-time communications over the Internet. Our software-based communications platform offers
         high-quality, easy-to-use tools for consumers and businesses to communicate and collaborate globally through voice, video and text conversations. During
         the first half of 2010, our users made 95 billion minutes of voice and video calls using Skype. TeleGeography Research in its 2009 report estimates us to
         be the leading global provider for international communications in 2009, accounting for approximately 12% of the world’s international long-distance
         calling minutes, up from 8% in 2008. In the first half of 2010, video calls accounted for approximately 40% of all Skype-to-Skype minutes, and our users
         sent over 84 million SMS text messages through Skype.

                Skype has grown rapidly to achieve significant global scale since we were founded in 2003. From June 30, 2009 to June 30, 2010, we grew our
         registered users from 397 million to 560 million. From the three months ended June 30, 2009 to the three months ended June 30, 2010, we grew our
         average monthly connected users from 91 million to 124 million and our average monthly paying users from 6.6 million to 8.1 million. See “Selected
         Financial Data—Key Metrics” for definitions of these metrics and their limitations. Although we have achieved significant global scale and user growth to
         date, the penetration of our connected and paying users is low relative to our market opportunity. It is our goal to continue to grow both our connected and
         paying users as Internet access proliferates globally and our penetration increases.

                We believe the scale, global distribution and growth of our user base provide us with powerful network effects, whereby Skype becomes more
         valuable as more people use it, thereby creating an incentive for existing users to encourage new users to join. We believe that these network effects help
         us to attract new users and provide significant competitive advantages, such as strengthening our brand and enabling us to benefit from “viral” marketing,
         which provides us with a cost advantage by keeping our user acquisition costs low. In addition, our scale and network effects encourage other companies
         to form strategic relationships with Skype, creating more value for our users and increasing user engagement. For example, we have recently announced
         strategic relationships with leading mobile operators such as Verizon Wireless in the United States and with television manufacturers (LG, Panasonic and
         Samsung) that embed Skype software in their applications and devices. Strategic relationships like these help us make Skype present in more
         communications devices, which increases the accessibility and usage of Skype by our large and growing user base.

                We believe our highly scalable peer-to-peer software architecture gives us a significant cost advantage compared to conventional communications
         networks because it utilizes our users’ existing Internet connections and does not require us to build or maintain a physical communications network. As a
         result, we can add new users and provide them with a wide range of communications tools at minimal incremental cost to us, allowing us to offer many of
         our products for free. We believe our low cost and highly scalable peer-to-peer software architecture positions us to grow in new regions faster and
         address opportunities more quickly than many other competitive offerings.

               In the first six months of 2010, we generated $406.2 million of net revenues and our Adjusted EBITDA was $115.8 million. While Skype-to-Skype
         voice, video and text conversations are free, our primary source of revenue, to date, has been from the purchase of credit (on a pay-as-you-go or
         subscription basis) for our SkypeOut product, which provides low-priced calling to landlines and mobile devices. Going forward, we plan to continue
         growing and diversifying our sources of revenue in four specific areas. First, we believe that there is a significant opportunity to grow our user base.
         Second, we believe that we can generate more communications revenue from our users by improving awareness and adoption of our paid products and
         introducing premium products such as group video calling. Third, we will continue to develop new monetization models for our large connected user base.
         We currently generate a small portion of our net revenues through marketing services (such as advertising) and licensing, which we expect will grow as a
         percentage of our net revenues over time. Fourth,

                                                                                     130




138 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         we will broaden our user base to include more business users. For example, we have recently released and will continue to develop and market Skype for
         Business products that aim to capitalize on demand from Skype for small, medium and large businesses.

               We also believe that Skype technology can provide significant humanitarian benefit. For example, after the Haiti earthquake in January 2010, when
         landline and cell phone coverage were lost, Skype donated $2 of Skype Credit (equivalent to over one hour’s calling to the United States or other global
         rate countries) to every registered Skype user in Haiti to allow them to contact friends and relatives abroad on any fixed or mobile network for free. Skype
         was also used extensively by reporters in the aftermath of the earthquake to help alert the United States and other nations to the scale of the disaster and the
         urgent need for help.

                                                                             Recent Developments

                In November 2009, we were acquired from eBay by an investor group, led by Silver Lake and including the Canada Pension Plan Investment Board
         (CPPIB) and Andreessen Horowitz. In connection with the Skype Acquisition, eBay received a significant ownership stake in the Company, and Joltid also
         made an equity investment in the Company. We believe that our investor group includes a unique combination of investors and operators with specific
         domain expertise and skill sets, including Silver Lake, a leading large-scale global technology investor with extensive operating experience; CPPIB, an
         institutional investor with deep sector expertise, and Andreessen Horowitz, an Internet-focused venture capital specialist, together with the Internet
         experience of eBay and the Skype-specific and consumer-facing Internet knowledge of Skype’s founders.

                Since the Skype Acquisition, we have continued to pursue our mission to be the worldwide communications platform of choice and have made
         significant improvements in our business. In particular, we have made significant investments in people and infrastructure, and we have continued to
         increase our user base, revenues and Adjusted EBITDA while adding new products and partnerships and further strengthening our capital structure.

                 Examples of our recent progress include:

         Acquisition of Intellectual Property
             •   In November 2009, we acquired from Joltid the intellectual property rights to technology that facilitates communications in the peer-to-peer network
                 of Skype users. We acquired this technology as part of a settlement that we and eBay reached with Joltid regarding our use of this peer-to-peer
                 communication technology, in which all outstanding litigation between the parties was resolved. Joltid also made an investment of $80 million in us.
                 We refer to these matters collectively as the “Joltid Transaction.”

         Increased Investment
             •   People. We recruited several new executives to strengthen our senior management team, including, among others, a new Chief Financial Officer,
                 Chief Marketing Officer, Chief Legal Officer and a new Head of Skype for Business, and grew our number of employees and contractors from 640 as
                 of June 30, 2009 to 839 as of June 30, 2010.
             •   Infrastructure. We have budgeted to invest approximately $37 million in capital expenditures in 2010, a substantial increase from $13.5 million in
                 2009. We are investing large amounts in a new SAP ERP system, for internal reporting and other control processes, and in Human Resources
                 systems to help us systematically attract, develop and manage our workforce. We are also investing to provide new office infrastructure across
                 multiple geographies to support our growth.

         Sustained Growth
             •   Users, net revenues and Adjusted EBITDA. We have significantly increased both our free and paying users, growing our average monthly connected
                 users by 36% and average monthly paying users by 23% from the

                                                                                       131




139 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                 three months ended June 30, 2009 to the three months ended June 30, 2010. Net revenues increased by 25.1% from $324.8 million in the first six
                 months of 2009 to $406.2 million in the first six months of 2010 and Adjusted EBITDA increased by 53.9% from $75.2 million in the first six months
                 of 2009 to $115.8 million in the first six months of 2010.
             •   Strategic relationships. We have launched several important commercial strategic relationships, including one with Verizon Wireless in the mobile
                 market in the United States and others in the consumer electronics market, such as arrangements with LG, Panasonic and Samsung to embed Skype in
                 certain HD televisions. More broadly, in July 2010, we released SkypeKit, a software development tool designed to meet demand from independent
                 software developers and consumer electronics manufacturers to incorporate Skype functionality within their own applications and devices.
             •   Products. We have released a significant number of new products, including:
                  •    Mobile. We have released Skype products on multiple platforms including iOS (iPhone), Blackberry, Linux, Android and Symbian.
                  •    Premium products. We have launched our group video calling product in a trial “beta” version of our Skype 5.0 for Windows client and
                       announced that it will be available as a premium product.
                  •    Marketing services, including advertising. We have launched products that allow businesses to market their products or services selectively
                       to our user base, including Click & Call, which enables users to initiate a Skype call from a website to participating businesses.
                  •    Skype for Business. We have launched our Skype for Business product offerings: Skype Manager, which allows businesses to manage Skype
                       accounts for their employees, and Skype Connect, which allows businesses to connect their private telephone branch exchange (PBX) over the
                       Internet to Skype’s peer-to-peer user network to achieve low-cost calling.

         Capital Structure
             •   Financing. We raised $825 million face amount of debt to help finance the Skype Acquisition, consisting of $700 million face amount of senior debt
                 and a payment-in-kind loan of $125 million from eBay. We refinanced our debt in February 2010. As part of this refinancing, we reduced our total
                 debt and significantly lowered our cost of debt by increasing our senior debt to a U.S. dollar equivalent $775 million face amount while repaying the
                 eBay payment-in-kind note in full. We also have a $30 million revolving credit facility.


                                                                              Industry Overview

               The large and growing global market for communications and collaboration solutions is being transformed by the Internet. Historically, calls could
         only be made by sending signals over a traditional copper wire telephone network from telephone to telephone. Today, single and multi-party voice, video
         and text communications can be transmitted from and to numerous devices over the Internet. Furthermore, as the Internet transforms the ways that people
         communicate, new markets and business models are being developed, including social networking, advertising, social gaming and virtual goods. We
         believe that our large and engaged user base, combined with our easy-to-use, high-quality platform, position us well to compete in these markets over time
         as they evolve.

               According to industry sources, the worldwide telecommunications services market, which includes traditional fixed voice, mobile voice,
         Internet-based voice (known as voice-over-Internet protocol (VoIP)), broadband and other fixed data and mobile data, was $1.5 trillion in 2009. The
         segments of this market where we currently compete are large and growing, including the markets for IP-based voice and video services, voice and video
         conferencing, SMS text messaging and unified collaboration. For example, according to industry sources, the size of the IP-based voice services market, in
         which we participate, was $41 billion in 2009 and grew at a 34% compound annual growth rate from 2006 to 2009.

                                                                                      132




140 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

              We believe that underlying market forces increasingly challenge the ways that communications have traditionally been provided and offer
         opportunities for innovative and disruptive solutions such as ours to help accelerate the transformation of the global communications industry. These
         market forces include:
                •    Growing desire to communicate and collaborate globally. The global communications infrastructure and increasingly interwoven economic
                     and educational systems have contributed to the globalization of business and society and are driving a significant increase in domestic and
                     international communications. People are becoming more mobile and travel more frequently for either work or pleasure. These trends create a
                     desire to communicate with friends, families and business associates across long distances. In many cases, they want to see, as well as hear,
                     the person or people with whom they are communicating and collaborating.
                •    Increasing penetration of wired and mobile Internet. As wired and mobile access has become more readily available, communications tools
                     have been developed to take advantage of the greater availability of bandwidth, and more people have gained access to those tools. Users have
                     become more accustomed to a growing variety of applications delivered through the Internet. As Internet penetration continues to increase
                     globally, more people will become exposed to emerging communicating tools.
                •    Expansion and diversification of the ways people communicate. Voice is now only one piece of the overall communications solution.
                     Improving technology and decreasing costs have helped drive demand for video-based communications. Technological innovations and the
                     emergence of global data networks have also led to rapid expansion in the ways people communicate, including not only video calling but also
                     instant messaging, SMS text messaging, micro-blogging, social networking and rich data collaboration. Furthermore, people are increasingly
                     demanding the ability to communicate with groups in addition to one-to-one communications.
                •    Proliferation of Internet-connected devices. Improvements in technology and the increasing penetration and speed of both wired and mobile
                     broadband Internet connections have contributed to a convergence of computer functionality and network connectivity in an expanding range of
                     consumer electronic devices, including traditional computing devices such as PCs, laptops, tablets, smartphones, MP3 players and video game
                     consoles, as well as other consumer products, including televisions and cameras. These products increasingly include or support media
                     components, such as microphones, speakers and cameras, which enable two-way voice and video communications.

              These market forces have provided the opportunity for easy-to-use, low-cost communications tools that are not restricted by traditional
         communications limitations (such as a specific geography or region), bound by hardware or purpose-built networks, or limited to single, non-integrated
         modes of communication, and that can link groups as well as individuals.


                                                                               Our Platform

               We have developed an innovative software-based communications platform that offers a simple and convenient way for our users to stay in touch
         virtually anywhere in the world. Skype users can have free voice, video and text conversations with other Skype users, or can call anyone with a landline
         or mobile phone number at a low cost. We believe that our platform is well-positioned to capitalize on the market forces that are transforming the global
         communications industry:
                •    We facilitate global communication and collaboration. Our software platform is currently available in 29 languages, and we have an
                     extremely broad reach in countries throughout the world. Our users can communicate globally by voice, video or text with their friends, family
                     or co-workers.
                •    We leverage existing fixed and wireless Internet infrastructure. Our software platform only requires an Internet-connected device to connect
                     instantly with our global network of 124 million average monthly connected users (for the three months ended June 30, 2010) for free, or with
                     mobile and landlines around the world at a low price. As fixed and wireless broadband infrastructure continues to grow and penetrate new
                     geographies, our potential market expands at minimal incremental cost to us.

                                                                                     133




141 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                •    We offer numerous communication tools and ways to communicate and collaborate. In addition to voice and video calling, our software
                     platform also offers a variety of communication and collaboration methods, such as instant messaging, paid SMS messaging, screen sharing
                     and file transferring. Features are seamlessly tied together on the Skype platform, allowing our users to switch easily between various ways of
                     communicating and collaborating. As well as one-to-one communications, users can communicate with groups using Skype through group
                     instant messages and voice or video group calls.
                •    Skype is available on diverse Internet-connected devices. Because Skype is software-based, users can access their Skype account and enjoy
                     our software platform’s functionality from virtually any Internet-connected device. Skype is currently available, either pre-installed or through
                     user download, on desktops and laptops, as well as selected mobile phones, netbooks, tablets, televisions and video game consoles.


                                                                        Our Competitive Strengths

               We believe our solution and business model distinguish us from alternative providers and bring us a number of differentiated competitive strengths:
                •    Large, growing and diverse global user base. Our user base is large and continues to grow rapidly and is geographically and
                     demographically diverse. For example, from the three months ended June 30, 2009 to the three months ended June 30, 2010, our connected
                     user base grew by 36% to 124 million average monthly connected users. Our software has broad global appeal and is actively used by people
                     across gender, age and income groups, helping everyone from business executives to grandparents to schoolchildren stay connected.
                •    Strong network effects. We and our users benefit from network effects. Skype becomes more valuable as more people use Skype, thereby
                     creating an incentive for existing users to encourage new users to join. As more users join and become accessible for Skype communications,
                     users’ engagement levels increase. With a larger user base and increased user engagement, we are well positioned to attract commercial
                     partnerships, as we have done successfully with mobile network operators, desktop and laptop computer manufacturers and leading global TV
                     manufacturers. New features and partnerships in turn broaden Skype’s usefulness, attracting more users. This results in viral marketing and
                     lower marketing expense for Skype.
                •    Strong communications brand. Despite low levels of marketing spending by us to date, we believe that Skype is among the most recognized
                     brands in Internet communications, appealing to a broad range of people across diverse demographic groups and geographies. Based on a
                     Skype-commissioned survey in the fourth quarter of 2009 in selected countries, our average brand awareness among respondents in these
                     countries was approximately 71%. We believe our high brand awareness results in strong consumer interest and loyalty and provides us with
                     an opportunity to educate potential new users about the value of our software platform.
                •    Low cost and highly scalable peer-to-peer architecture. The peer-to-peer architecture created by our software platform connects our users
                     by utilizing their existing network and computing resources. This provides us with a significant cost advantage because we are not required to
                     build or maintain a physical communications network, such as a wire or fiber optic network or cellular infrastructure. As a result, we can add
                     new users and provide them with a wide range of products at minimal incremental cost to us, allowing us to offer many of our products for
                     free. We believe our low-cost and highly scalable peer-to-peer software architecture positions us to grow in new regions and address
                     opportunities more quickly than many other competitive offerings.
                •    High-quality, multi-feature voice and video product suite. We offer a wide range of tools for our users to communicate and collaborate,
                     including voice and video calling, instant messaging, screen sharing and file transferring. For example, we recently introduced group video
                     calling in a trial “beta” version of our Skype 5.0 for Windows client, which allows our users to communicate with up to five other users in a
                     simultaneous

                                                                                     134




142 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                    video conversation. During the first half of 2010, approximately 40% of our Skype-to-Skype minutes were video calls, which we believe
                    demonstrates the high quality and utility of our video products. We believe our users value the breadth of our product offering and believe this
                    is evidenced by the significant overlap in feature usage between Skype-to-Skype voice and video calling, SkypeOut, SMS texts and instant
                    messaging. We believe that the quality of our communication tools is essential to the Skype user experience, and we have invested heavily to
                    ensure that our products are of high quality. For example, we offer wideband audio in many versions of our Skype software client, which we
                    believe offers a much more natural communications experience than the traditional telephone network.
                •   Payment infrastructure. Because of our size and experience, we have the ability to collect small payments in many countries around the
                    world. We currently accept payments in 15 currencies. We are able to accept multiple forms of payment, including PayPal, credit cards, debit
                    cards, by paying cash for a voucher and by transferring bank funds. Because users prepay for Skype Credit and subscriptions and we debit a
                    pay-as-you-go user’s Skype account as charges are incurred, we are able to process charges in small increments without incurring additional
                    transaction fees associated with credit and debit card payment processing. Additionally, we have substantial experience addressing fraudulent
                    payment activity. We have developed sophisticated anti-fraud practices and systems that couple algorithmic automatic detection with manual
                    scanning; PayPal and BiBit, our primary payment processers, are certified as compliant with the Payment Card Industry Data Security
                    Standards.
                •   Software platform that is device and network agnostic. Unlike some competitive offerings, our platform is software-based and is available
                    across multiple devices and networks. Our software runs on virtually all major computer and mobile operating systems and on multiple
                    hardware platforms, including televisions and mobile phones, and across Internet and mobile telecommunications networks. We believe that
                    the recent launch of SkypeKit in July 2010 will allow further adoption into more devices by enabling independent software developers and
                    consumer electronics manufacturers to incorporate Skype functionality within their own applications and devices. Because the Skype platform
                    is software-based, we can launch regular upgrades quickly and cost-effectively. Our users simply download our latest software upgrades and
                    enjoy new features without the cost and time required to upgrade hardware.
                •   Attractive financial structure. We believe that our business benefits from an attractive financial structure. For example, our cash flow and
                    working capital are enhanced by the fact that users of our paid communications services products, including SkypeOut, pay us in advance of
                    their use of our products; and the growing popularity of our subscription-based products provides us with higher predictability regarding our
                    future revenues. We believe our business is also characterized by low operating and capital expenditures as a result of the strong network
                    effects that help us grow our user base, our strong communications brand, which we have built despite low levels of marketing spending, and
                    the low-cost peer-to-peer architecture that does not require us to build or maintain a network, each as described further above. Furthermore,
                    we have relatively low cash tax expense, expressed as a percentage of our income or loss before income taxes. This financial structure
                    provides us the opportunity to invest cash generated from our operating activities in the continued development of innovative products and
                    technologies with the objective of further improving and diversifying our portfolio of products.

                                                                                    135




143 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                  http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                                                                                                         Our Users

               We believe that the growth and loyalty of our user base validate our competitive strengths. Our registered, connected and paying users have grown
         over time, which we believe is primarily attributable to the network effects of our users, our strong global brand and our differentiated technology and
         product offering. For a description of how we calculate each of our metrics, see “Selected Financial Data—Key Metrics.” The chart below highlights the
         growth in our users since 2007:




         (1)   Our registered user metric is difficult for us to verify and is subject to a degree of overstatement. For more information, see “Risk Factors—The number of our registered users overstates the number of
               unique individuals who register to use our products.” Our registered user number includes users who registered through their MySpace account and excludes users that have registered on Skype through
               our investment to address the Chinese market, Tel-Online Limited. For more information, see “Selected Financial Data—Key Metrics.”
         (2)   Our connected and paying user metrics are subject to uncertainties and inaccuracies and may be overstated or understated. For more information, see “Risk Factors—Our connected users metric is
               subject to uncertainties and may overstate the number of users who actively use our products” and “—Our paying user and communications services billing minutes metrics are subject to a degree of
               inaccuracy due to fraudulent transactions and our method of calculating these metrics.” Our average monthly connected and paying user numbers include users who registered through their MySpace
               account and exclude users that have connected to Skype through our investment to address the Chinese market, Tel-Online Limited. For more information, see “Selected Financial Data—Key Metrics.”

               Since 2008, our connected users have increased rapidly due to the increasing popularity of our free products, including video calling, which
         represented approximately 40% of all Skype-to-Skype minutes for the first half of 2010. We view the growth in our connected user base as an opportunity
         to convert more of these connected users into paying users in the future, as discussed further below under “—Our Strategy.”

                                                                                                              136




144 of 341                                                                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                   http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                Our paying users exhibit strong long-term loyalty as well as stable spending patterns over time, as the chart below demonstrates. It shows monthly
         pay-as-you-go billings on a constant currency basis for the months of December 2006, 2007, 2008 and 2009 broken down by the year our users first
         registered with Skype and helps illustrate the billing consistency of paying users over time. For example, pay-as-you-go billings for users who first
         registered with Skype before 2008 were substantially the same in December 2009 as they were in December 2008.




         (1)   Pay-as-you-go billings represent the product of the number of communications services billing minutes and the stated pay-as-you-go rate per minute during the relevant period. Billings in foreign
               currencies are translated at a constant rate in the periods presented for the purpose of assessing customer loyalty.

               Our subscription packages further promote customer loyalty. Our subscription packages have substantially grown in popularity. For the three months
         ended June 30, 2010, 2.0 million of our paying users were signed up to subscription packages compared to 1.4 million for the three months ended June 30,
         2009.

                We believe our users are very engaged and use our products for a variety of communication activities including voice calls, video calls, paid SMSs,
         instant messaging and collaboration. Given the high-quality and cost-effective platform that we offer, our users typically utilize our products for long
         periods of time. We believe this high user engagement reflects not only the price advantage of Skype but also the fact that users tend to communicate using
         Skype for some of their most important relationships (with family, close friends and business associates). The engagement levels of our users have
         increased over time. Below is a comparison of usage patterns of our product between 2008 and 2009:

                                                                                                                                                                                                        2008 to 2009
                                                                                                                                        2008                                  2009                       % change
         Average total voice and video minutes per connected user per                        month(1)(2)                           86 minutes                           107 minutes                                 24.3%
         Average total communications services billing minutes per paying user per
            month                                                                                                                112 minutes                          131 minutes                                   16.3%
         Skype-to-Skype voice and video minutes in the year(2)                                                               65.5 billion minutes                 113.0 billion minutes                             72.6%
         Communications services billing minutes in the year                                                                  6.9 billion minutes                 10.7 billion minutes                              54.0%
         Number of paid SMS text messages in the year                                                                          85 million SMS                       126 million SMS                                 48.3%
         Percentage of Skype-to-Skype calls lasting 10 minutes or longer in December                                                  48%                                 52%                                       —

                                                                                                               137




145 of 341                                                                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                 http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents


         (1)   Total voice and video minutes comprise total Skype-to-Skype minutes and total communications services billing minutes.
         (2)   Total Skype-to-Skype minutes include minutes connected through our Chinese investment, Tel-Online Limited.

                Skype appeals to a geographically and demographically diverse range of users. People use Skype in a variety of different ways, from friends or
         relatives calling each other in different cities or countries, to grandparents video-calling their grandchildren, to teachers conducting classes remotely, to
         students text messaging each other or to business associates transferring files or screen-sharing. Our appeal is global, and our users correspondingly vary
         in age, gender and professional background. For example, for the three months ended June 30, 2010, connected users registered in the United States
         represented approximately 16% of our global average monthly connected users, while no other single country represented more than 7% of our average
         monthly connected users. The table below shows the United States and each region of the world measured by the number of average monthly connected
         users and average monthly paying users for the three months ended June 30, 2010, and the percentage of our total connected or paying users, respectively,
         in that country or region.

                                                                                                                                             Europe, Middle
                                                                                                                                             East and Africa
                                                                               United States                 Other Americas                     (EMEA)                Asia Pacific               Total
         Number of connected users (in millions)                                          20                               13                            71                   20                  124
         % of total Skype connected users                                                 16%                              10%                           58%                  16%                 100%
         Number of paying users
           (in millions)                                                                  1.9                              1.1                          3.6                   1.5                 8.1
         % of total Skype paying users                                                    24%                              14%                           44%                  18%                 100%

                Additionally, a Skype-commissioned third-party survey of Skype users in the United States over the age of 15 during the month of July 2009 showed
         the following characteristics, illustrating a broad distribution between gender and age groups, as compared to the general population of the United States as
         shown in the most recent U.S. census bureau data of 2002:

                                                                                                                                                         Age Range
                                                                                                                                 16-24         25-34       35-44      45-54           55+
                                                                                                                                 Years         Years       Years      Years          Years        Total
         Skype users:
         Male                                                                                                                        9%          14%            8%       8%             8%         46%
         Female                                                                                                                     12%          18%            7%       9%             9%         54%
         Total                                                                                                                      20%          32%           15%      16%            17%        100%
         U.S. population:
         Male                                                                                                                        9%           9%            9%       9%            14%         49%
         Female                                                                                                                      8%           8%            9%       9%            17%         51%
         Total                                                                                                                      17%          17%           17%      18%            31%        100%

               The same Skype-commissioned third-party survey of U.S. users during the month of July 2009 showed the following income demographic
         characteristics, highlighting a more affluent income distribution compared to that of the general population of the United States as shown in the most recent
         U.S. census bureau data of 2002:

                                                                                                                                                Annual Income Range
                                                                                                                                  $10,000-           $25,000-          $50,000-
                                                                                                          < $10,000                24,999             49,999            99,999               > $100,000
         Skype users:                                                                                             6%                     10%               27%                40%                   17%
         U.S. population:                                                                                        29%                     24%               25%                16%                    6%

               In addition to our consumer users, we believe there is significant demand for our Skype for Business product offerings. For example, based on an
         internal research survey of over 40,000 users conducted in the first quarter of 2010, approximately 37% of the respondents reported that they used our
         products for some business or

                                                                                                             138




146 of 341                                                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                     http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         business-related purposes. We believe that the business user market represents a significant growth opportunity for Skype. We currently offer two products
         targeted specifically at the business market, Skype Connect and Skype Manager. As of June 30, 2010, we have over 2,400 active users of Skype Connect
         and 161,000 businesses operating Skype Manager. We have found that these products appeal to large, small and medium-sized businesses.

                                                                                             Our Strategy

                Our mission is to be the communications platform of choice for consumers and businesses around the world. We aim to continue to grow our scale of
         users, while also raising our usage levels by becoming increasingly integral to our users’ lives. We believe we have a significant opportunity to grow our
         users, revenue and profitability by increasing the penetration of our user base, expanding their use of our free and paid products, and by developing new
         products and monetization models as the industry continues to evolve.

               We have grown rapidly since our inception in 2003, and it is our goal to continue to grow our users, revenue and profitability. Anyone with an
         Internet connection and connected device can use our software. Our connected and paying users remain at relatively low levels of penetration, and
         moreover our addressable market continues to expand as broadband access becomes more available around the world. The table below illustrates our
         average monthly connected users for the three months ended June 30, 2010 relative to the total number of Internet users and our average monthly paying
         users for the same period relative to the total number of connected users by region, as well as relative historical growth rates of Internet users, our average
         monthly connected users and our average monthly paying users:

                                                                                                                     Other
                                                                                                  United States     Americas      EMEA       Asia Pacific       Total
         Total Internet Users (2009)(1) (in millions)                                                     219           181        445              643         1,488
         Number of Skype connected users (in millions)                                                      20           13         71               20           124
         % of region’s Internet users                                                                        9%            7%       16%                3%           8%
         Number of Skype paying users (in millions)                                                        1.9           1.1       3.6               1.5          8.1
         % of region’s Skype connected users                                                                 9%            9%        5%                8%           7%
         Annualized Growth in Internet users, 2007-09(2)                                                     5%            7%        8%              12%            9%
         Annualized Growth in average monthly Skype connected users, from
           the three months ended December 31, 2007 to three months ended
           December 31, 2009                                                                                67%          42%        40%              33%           42%
         Annualized Growth in average monthly Skype paying users, from the
           three months ended December 31, 2007 to three months ended
           December 31, 2009                                                                                34%          28%        23%              24%           26%
         (1)   Based on estimated Internet users for 2009, according to Strategy Analytics
         (2)   Strategy Analytics, July 2010

                 Our strategy has four key components:
                 1.      Continue to grow our connected and paying user base. In the three months ended June 30, 2010, we had 124 million average monthly
                         connected users and 8.1 million average monthly paying users. In addition to maintaining our successful track record of creating compelling
                         products which engage and delight our current user base and continue to attract new users, we will pursue a number of initiatives to enhance
                         the growth of our user base and to increase the portion of our users who use paid services. Specifically, we plan to:

                           •       Develop new marketing initiatives. We believe Skype’s low cost “viral marketing” model remains a highly effective and low cost
                                   method of attracting new users to the network of Skype users. Going forward, we aim to supplement our viral marketing strategy with
                                   other targeted initiatives,

                                                                                                 139




147 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                             particularly focused on increasing paid usage by our users, such as user emails, in-product marketing (that is, the discrete use of a
                             small banner within our Skype software client to market particular Skype products to our users) and our website, Skype.com, where
                             users come to register, download our software or pay for their Skype Credit.
                     •       Leverage strategic relationships. We believe we can increase our user base further by offering our Skype software client
                             pre-installed on numerous devices, including PCs, laptops, smartphones and televisions, through our existing and new relationships
                             with partners. Skype’s software client is currently available for virtually all PC and Mac computers, iPhone, Android, Blackberry and
                             Nokia smartphones and devices such as televisions and the Sony PlayStation Portable. We have recently introduced SkypeKit, which
                             enables hardware and software makers to independently add Skype functionality to their devices and applications.
               2.   Increase usage of our free and paid products and extend our relationship with our users. Our mission is to be the communications platform
                    of choice for our users. We believe our users typically begin using Skype primarily for personal communications among a close community of
                    family and friends. As our users continue to use Skype more often, they begin to recognize the full benefits of using our products and many
                    migrate to using Skype as their preferred communications tool across a variety of connected devices, at home, at work and on the move. We
                    seek to capitalize on this migration path and to grow usage of our free and paid products through the following initiatives:
                     •       Improve our suite of free products. When Skype was founded in 2003, our mission was to provide high quality free calling for our
                             users. Over time, we have developed a range of paid products. However, we remain committed to our origins of providing an
                             easy-to-use, high-quality free experience to our users, many of whom begin their relationship with Skype through our free products and
                             then migrate to our paid products over time. Going forward, we aim to continue to improve and broaden our free products, as well as
                             increasing the range of devices through which our users can access our free products. We believe that these developments will
                             continue to increase our users’ engagement levels with Skype and their usage of both our free and paid products.
                     •       Add new features and paid products. New features have the potential to increase usage. Specifically, since we introduced video
                             calling in 2005, average call length has increased significantly. For example, in December 2005, 38% of calls were 10 minutes or
                             longer whereas in June 2010, 52% of calls were 10 minutes or longer. Video calling accounted for approximately 40% of our total
                             Skype-to-Skype minutes in the first half of 2010. We will continue to add more engaging features to increase our functionality such as
                             group video calling. We currently do not generate revenue directly from video calling. Over time, we intend to introduce and charge
                             for certain new products that will be available on a premium basis, including group video calling.
                     •       Become ubiquitous on connected devices. Our software now runs on virtually all major computer and mobile operating systems, on
                             multiple hardware platforms, including televisions and mobile phones, and across Internet and mobile telecommunications networks.
                             We intend to continue to release versions of our software to increase the accessibility of Skype to our users on more devices, which
                             we believe will increase their usage.
                     •       Increase awareness of paid products and make it easier for users to pay. We will continue to market to our existing connected users
                             to make them more aware of Skype’s paid products. We are working to facilitate the purchase of Skype Credit and subscriptions in
                             markets where credit and debit cards are not yet commonplace and to explore new payment methods such as the use of mobile phone
                             and other accounts to purchase Skype Credit.
                     •       Promote subscriptions. We believe that subscription pricing encourages more use than pay-per-minute pricing by eliminating the
                             marginal cost to the customer of a call. We will seek to increase the number of our users who purchase subscriptions, thus encouraging
                             them to use Skype more often and explore our full suite of communications services.

                                                                                     140




148 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               3.    Develop new monetization models, including advertising. Our users made over 152 billion minutes of Skype-to-Skype calls in the twelve
                     months ended June 30, 2010. We believe this represents a meaningful opportunity to increase our revenue from alternative monetization
                     models, including advertising, gaming and virtual gifts. For example, we are exploring ways to increase our advertising revenue through
                     launching a premium display advertising product, and we intend to grow our Click & Call and global directory advertising businesses as well.
               4.    Broaden our user base to include more business users. We believe the business communications market represents a large opportunity for
                     Skype. Approximately 37% of over 40,000 of our connected users surveyed in the first quarter of 2010 told us that they use our product
                     platform occasionally or often for business-related purposes. We believe there is a significant opportunity to better serve the communications
                     needs of the small and medium enterprise segment, as well as larger enterprise customers, by focusing on user needs in this market and
                     developing additional products specifically tailored to business users. We plan to address this opportunity through the following initiatives:
                       •     Introduce new business-focused products. We have released two products to better serve and grow revenue in the enterprise market:
                             Skype Manager, which allows businesses to create Skype accounts, purchase our paid products and manage and pay for the use of
                             Skype products by their employees, and Skype Connect, which allows businesses to connect their private telephone branch exchange
                             (PBX) over the Internet to Skype’s peer-to-peer user network to achieve low-cost calling. Skype Connect already has over 2,400
                             active global customers, and has already been certified by Avaya, Cisco, SIPfoundry and ShoreTel, among others, as interoperable
                             with their products.
                       •     Build a new sales force, support team and management tools. We are investing to develop our business features and functionality and
                             are exploring options such as adding more robust technical support, video and data conferencing, and collaboration solutions. We are
                             also growing our business sales team to be able to focus on selling these products in the business market.

               Skype has always been an innovator. In just seven years, we have evolved from a startup providing a VoIP solution via PCs to a global software
         platform providing a high-quality and low-cost integrated voice, video and text communications platform to 124 million connected users around the world
         across multiple platforms and devices (for the three months ended June 30, 2010). We have come a long way, but to achieve our mission to be the
         communications platform of choice we must continue to innovate to “win the habit” among our existing users and continue to attract new users, capitalize
         on our nascent business user base and develop additional revenue streams to monetize our vast user scale.

                                                                                Our Products

               Our main product category is communications services. Our communications services products provide users with the ability to communicate with
         one another via their desktops, laptops, mobile phones, televisions or other Internet-connected devices. We also offer marketing and other services that
         allow businesses to leverage our large and active user base to market their products, as well as our product licensing activity. Communications services
         have historically formed the vast majority of our revenues, and we have recently launched several new marketing and other services products. While
         marketing and other services currently account for only a small portion of our revenues, we believe they offer us significant future growth opportunities.

                                                                                     141




149 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                                                  http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Communications Services
               The table below shows our existing communications services offerings and their current cost and payment format on Skype. While some products
         within each of these categories are designed to appeal to consumer users and others are targeted at business users, the majority of our products are
         designed to be used by both of these communities.

                                                                                                                                                                        Cost / Payment Format
         Offering
         Category                                                                    Product                                                      Free                  Subscription                   Pay-As-You-Go
         Voice                                   Skype-to-Skype                                                                                   ü
                                                 SkypeOut                                                                                                               ü                              ü
                                                 SkypeIn                                                                                                                ü
                                                 Call forwarding                                                                                                        ü                              ü
                                                 Multi-party conferencing                                                                         ü                     ü                              ü
                                                 Skype-to-Go                                                                                                            ü                              ü
         Video                                   Video calls                                                                                      ü
                                                 Group video calling(1)                                                                           ü                     ü
         Messaging                               Instant messaging                                                                                ü
                                                 SMS Text messaging                                                                                                                                    ü
                                                 Voicemail                                                                                                              ü
         Collaboration                           Screen sharing                                                                                   ü
                                                 Multi-party chat                                                                                 ü
                                                 File transfer                                                                                    ü
         Presence                                Online presence                                                                                  ü
                                                 Mood                                                                                             ü
         Directory                               Registered user directory                                                                        ü
         Access                                  SkypeAccess                                                                                                                                           ü
         (1)   Group video calling is free today and available for download from www.skype.com in a “beta” version of our Windows client version 5.0, but we plan to charge a subscription fee for this service when it
               is released later in 2010. The information on our website is not incorporated by reference into this prospectus.


         Payment Formats
               For the three months ended June 30, 2010, we had 8.1 million average monthly paying users, who paid for our products through one or both of the
         following formats:
                    •    Pay-As-You-Go (“PAYG”) Credit. Users can purchase “Skype Credit” which is credited to the user’s account where it can be used to fund
                         SkypeOut minutes, SMS texts, Skype Access or used to pay for other PAYG products. When using PAYG for SkypeOut calling, users are
                         charged a small connection fee and a per-minute usage fee. During the three months ended June 30, 2010, 82% of our paying users used PAYG
                         credits.
                    •    Subscription. Our subscriptions provide customers access to our paid products on an unlimited basis (subject to specified fair usage policies)
                         for a specified period of time. These subscriptions are available for a variety of products on a monthly, quarterly, yearly or 24-month basis.
                         Our subscription prices vary by product as well as by destination and the number of countries covered under the plan. Since their introduction,
                         the percentage of our paying users with subscription packages has increased substantially. During the three months ended June 30, 2010, 24%
                         of paying users were signed up to subscription packages compared to 10% during the three months ended June 30, 2007.

                 Some users choose a subscription product and supplement their Skype usage with the pay-as-you-go payment method.

                                                                                                              142




150 of 341                                                                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Product Description
         Voice
         Skype-to-Skype              Allows Skype users to call other Skype users over the Internet for free. Users can call other users on a one-to-one or
                                     group basis (see multi-party conferencing).
         SkypeOut                    Allows Skype customers to call landline and mobile numbers at prices that we believe are significantly lower than
                                     those offered by many incumbent telecommunication providers. When a user wishes to make a SkypeOut call, he or
                                     she enters the telephone number into the Skype software client, and the software client then routes the call as far as
                                     possible through the Internet before Skype’s carrier partner routes and connects, or “terminates,” the call (or has the
                                     call terminated on its behalf by a local carrier) to a landline or mobile number.
         SkypeIn                     Allows a customer to subscribe for a number made available by one of Skype’s carrier partners. The number is
                                     assigned to a user, who can then receive calls from either a landline or mobile phone into their Internet-connected
                                     Skype software client. This product is currently available in 25 countries.
         Call Forwarding             Allows customers to forward incoming Skype calls to one or more landlines or mobile phones in almost any country.
                                     Call forwarding is charged on the same basis as SkypeOut minutes made by the user and are drawn from either
                                     pay-as-you-go credit or from a subscription as appropriate.
         Multi-party Conferencing    Allows customers to make Skype-to-Skype calls to groups of up to 24 other Skype users for free, and to make
                                     SkypeOut paid calls to groups of up to 24 landline and mobile telephones.
         Skype-to-Go                 Allows customers to access their Skype account while away from their computer or Internet-enabled device, using a
                                     landline or mobile phone primarily to make low cost international SkypeOut calls to mobile and landline destinations
                                     by dialing a local telephone number and responding to an interactive menu. This offering is currently available in 18
                                     countries.

         Video
         Video Calls                 Allows users to make free one-to-one video calls to another Skype user. Skype introduced high-definition video
                                     capability on certain versions of the Skype software clients in January 2010.
         Group Video                 Allows customers to hold a video conference with up to five other Skype users. This group video calling capability is
         Calling                     currently available in Skype version 5.0 of our Windows client, which is currently in a free trial “beta” phase and is
                                     scheduled to be officially launched in late 2010. We intend to introduce this product on a paid basis, where the host
                                     conference participant must be a paying user of the products.

         Messaging
         Instant Messaging           Allows a Skype user to send an instant message to another Skype user over the Internet.
         SMS Text Messaging          Allows customers to send SMS text messages directly from their Skype account to a mobile phone. This service is
                                     charged on a per use basis dependent on the destination.
         Voicemail                   Customers can set up voicemail with a personalized greeting and can be alerted by SMS text message or email of the
                                     receipt of a new voicemail. Customers can also convert voicemails to an SMS text message for a small fee.
                                     Voicemail is available on a subscription basis.

                                                                            143




151 of 341                                                                                                                                          8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Collaboration
         Screen Sharing                       Skype users participating in calls over the Internet can share their desktop or laptop screen with another participant
                                              while continuing to be able to hear each other speaking.
         Multi-party Chat                     Users can engage in multi-party instant messaging and exchange text messages over the Internet simultaneously with
                                              multiple Skype users.
         File Transfer                        Users can transfer large or small files of a variety of formats (for example, documents, videos and photos) to
                                              individuals or user-defined groups.

         Presence
         Online Presence                      Allows users to communicate at their discretion their availability, facilitating instant messaging and voice and video
                                              calling.
         Mood                                 Allows users to leave commentary for their connections indicating their interests, thoughts, location, travel plans or
                                              other information. Users can customize their “mood message” with a picture or short video.

         Directory
         Registered User Directory            Allows users to search for their contacts on Skype using their Skype username, email address or other appropriate
                                              demographic information.

         Access
         Skype Access                         Identifies available compatible WiFi networks offered by third parties within range and then allows the customer to
                                              connect with one click on a pay-as-you-go basis. This product allows customers to pay only for connectivity they use
                                              rather than buying “day passes.”

         Skype for Business
                We currently offer two products targeted specifically at the business market, Skype Manager and Skype Connect. We believe that the trend towards
         distributed workforces is creating increased pressure on businesses to invest in new types of communication tools. Our objective is to meet the unique
         requirements of today’s distributed workforce and virtual offices by providing a rich set of communications tools that enable businesses to collaborate and
         compete in the global marketplace. Skype’s voice and video communication tools can reduce costs for businesses while providing operational efficiencies
         by connecting an increasingly mobile workforce with one another through Skype audio, video and messaging services, as well as facilitating better
         communication with customers and partners.

                                                                                     144




152 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               Skype’s current product portfolio for businesses consists of:
         Skype Manager                        Allows businesses to create Skype accounts, subscribe and pay for products and manage the usage of Skype products
                                              by their employees. Skype Manager allows administrators and IT professionals within a business to add users, share
                                              contact information and provision employees with Skype offerings, products (for example, SkypeIn and voicemail)
                                              and Skype Credit (including both pay-as-you go and subscriptions).
         Skype Connect                        Allows businesses to connect and use their private telephone branch exchange (PBX) over the Internet to make and/or
                                              receive Skype calls. Businesses can make SkypeOut calls from standard business telephone systems and they can also
                                              enable their existing telephone systems to receive inbound calls from their regular phones via SkypeIn. Businesses
                                              can also receive calls from Skype end points to their PBX, through Click & Call.
                                              Skype Connect customers are charged on a subscription or pay as you go basis for SkypeOut calls made, plus a
                                              subscription fee based on the number of concurrent calls in or out of the PBX.

                Our business product portfolio is designed to appeal to different types of enterprise users, with different IT and communication requirements and
         priorities. Many businesses already have PBXs installed and may be slow to migrate to communications through their computers and other endpoints.
         Skype Connect is highly relevant for these businesses, as it allows them to retain their current PBX infrastructure, while also enjoying cost benefits from
         utilizing Skype and facilitating communication with Skype-connected users. Other businesses prioritize adopting new technology and value a greater degree
         of management and control. Skype Manager responds to this need by allowing businesses to manage all of their accounts. In both cases, the products have
         been designed to overcome some of the common obstacles that businesses might have before moving to a new communications model.

         Marketing and Other Services
               Skype has a portfolio of marketing and other services product offerings that are designed to allow businesses to market their products or services to
         our user base. Our marketing and other services offerings include:
         Click & Call                           Automatically inserts “buttons” into websites as users view them, enabling users to initiate a Skype call from a
         Advertising                            website to any phone number using Skype. A premium listings option is available for businesses, similar to a 1-800
         With Skype (Click & Call)              number; this provides for greater prominence and allows businesses to offer free calls to Skype customers on a
                                                pay-per-click basis.
                                                This product was launched in early 2010 and as of June 30, 2010 approximately 50,000 businesses had signed up
                                                for Click & Call.
         Sponsored Downloads                    We partner with third parties to bundle their products with our software downloads, so that a user has the option to
                                                download the third-party product while installing Skype. We are paid a fee for each successful download of the
                                                third party’s products.
         Product Licensing                      We earn revenues from licensing arrangements with third parties, who typically pay us a one-time or recurring
                                                per-device or per-user licensing fee for allowing them to include Skype in devices they manufacture or sell.
         Skype-Compatible Hardware              We promote Skype-compatible phones and select accessories, such as headsets and webcams, through our website.
                                                We refer users to third-party vendors of these products, who pay us a referral fee when a user either clicks through
                                                to the third party’s website or buys the third party’s product based on our referral. We have a “Skype Certified”
                                                mark that we award to hardware solutions that we believe comply with our testing and quality criteria.

                                                                                     145




153 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

              In addition, in July 2010, we introduced SkypeKit, which is a software development tool that enables independent software developers and
         consumer electronics manufacturers to incorporate Skype functionality within their own applications and devices. See “—Product Development and
         Research.”


                                                                                 Competition

               Competition in the communications industry is varied and evolving. Our competitors include a variety of communication service and product
         providers, including Internet, software and telecommunications companies. Historically, we have been able to compete well against these companies as
         evidenced by our growth in users over time and rapid increases in market share of international calling minutes from 5% in 2006 to 12% in 2009 according
         to TeleGeography Research. During this time, both established, well-capitalized telecommunications companies and start-up Internet companies have
         introduced products that aim to compete directly with our products. Our average monthly connected user base grew by 163% over the three year period
         from the three months ended December 31, 2006 to the three months ended December 31, 2009.

               While we compete with some of the products and services of some of these companies, Skype is viewed as a strong partner given our position in the
         industry. We have already developed strategic relationships with many Internet and telecommunications providers, including Verizon Wireless and
         Hutchison Whampoa’s 3 network, and we believe that the opportunity remains to form additional such relationships going forward. We believe that our
         software platform provides additional functionality that can help to overcome the limitations to which some of their offerings may be subject.

               Internet and software companies. We compete with divisions of large Internet and software companies, including Google, Microsoft, Apple and
         Yahoo!, which offer a selection of instant messaging, voice and video communications products to their users. We compete with these companies
         principally on the basis of quality of voice and video communications, geographic reach, scale of user base and cost. We believe that elements of Internet
         and software companies’ business models may lack critical elements to achieving widespread acceptance, including:
                •    Lack of focus on voice and video communications. We believe that other Internet companies do not prioritize their voice and video
                     communications solutions to the extent that we do. As a result, we believe their brands may not be associated by consumers with
                     communications and their product development and sales and marketing departments may be less focused on developing and selling their
                     communications products than on their primary products and services.
                •    Lack of scale in community of voice and video communication users. Although some Internet companies have very large user bases, we
                     believe their users are typically attracted by features other than voice communications. As a result, we believe their solutions are not currently
                     being actively adopted by the large number of users needed to create the network effects that we benefit from.
                •    Limitations on voice/video quality and ease of use. We believe voice and video quality and ease of use are among the critical drivers of the
                     adoption and usage of a communications product. We believe the voice and video communications solutions of Internet companies are
                     generally “add-ons” to their other products. We believe that, as a result, these add-on applications are generally less intuitive and more
                     difficult to use than Skype’s products.

               Telecommunications companies and hardware-based VoIP providers. Although we are not a replacement for traditional telephone services, we
         compete with certain products and services offered by regulated telecommunications companies that provide landline, cable or wireless
         telecommunications products. We also compete with certain products and services offered by hardware-based VoIP telecommunications providers that,
         unlike Skype’s software-based architecture, sell dedicated hardware allowing customers to place calls over the Internet, and that have recently begun to
         challenge incumbent telecommunication companies with respect to

                                                                                      146




154 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         certain products in their regional markets. We compete with these companies principally on the basis of cost, geography and product functionality. We
         believe telecommunications and hardware-based VoIP providers’ offerings have the following principal limitations:
                •    Higher-cost products. Traditional telecommunications companies are typically required to make significant capital investments, due to the
                     costs of operating and maintaining a purpose-built landline or wireless network. In addition, almost all of these networks require proprietary,
                     specific phone equipment. While hardware-based VoIP companies do not have their own networks, they do incur substantial hardware costs to
                     manufacture or procure key components of their products. Both these classes of companies are also subject to significant regulatory and
                     compliance obligations in virtually every jurisdiction in which they operate. Many of these costs may be transferred to the customer in various
                     forms, such as high monthly fees, connection charges, installation charges and usage charges, and may include long-term contracts with
                     expensive termination fees.
                •    Higher customer acquisition cost. Customer acquisition costs for telecommunications companies and hardware-based VoIP providers may be
                     higher because their services require installation or dedicated hardware and because these companies engage in more paid marketing efforts.
                     Customers of these providers may not directly benefit from having more users utilize the providers’ services, which limits the potential for
                     network effects and viral marketing.
                •    Regional services with limited geographic reach. Because telecommunications companies and hardware-based VoIP providers are generally
                     based in a specific geographic area, consumers may face additional costs, such as long distance or roaming charges, when calling a number or
                     using a mobile phone outside that area. In addition, even solutions that are designed for mobility, such as mobile phones, may not operate in
                     different geographies because of incompatibility with local networks.
                •    Single mode of communication. Many of these telecommunications companies and hardware-based VoIP providers offer voice calling
                     services only and do not address the need for a unified communications and collaboration solutions, including video conferencing.

               Going forward, as we enhance our communications platform, we may enter new markets and face competition from new companies. For example,
         our business products may compete over time with companies that provide telecom services and collaboration solutions to small, medium and large
         enterprises. While we do not believe we compete directly today with these companies, as we develop and build out our business offering, we believe
         Skype could evolve to directly compete with small and medium-sized business services providers. Many vendors in this market have a broad set of
         products and offer features we do not offer, such as email. In addition, many vendors in the small and medium-sized business market have recognized
         brands in the business marketplace and incumbent status, including, in certain cases, long-term customer contracts, which may make it difficult for us to
         compete with them.

               Despite the limitations and challenges faced by our competitors, the communications industry is highly competitive, which presents risk for our
         business. For example, the leading Internet and software companies have very large networks of users, strong brands and significant resources. Some of
         these competitors charge less than we do, and most have also historically offered free calling between their users. In addition, new Internet product and
         software companies may choose to enter our market and integrate these products with their existing products. We may also face a disadvantage because we
         do not currently offer email, a product that is offered by many of our competitors, including Internet companies, and telecommunication providers. Many of
         our competitors also have significant resources and strong retail presences. The telephone companies have historically dominated their regional markets
         due to their incumbent status and ability to offer features that we do not provide, such as emergency calling services and “bundled” services. We also
         compete with certain products offered by cable and satellite broadcast companies. All of these companies have the ability to offer bundled services to their
         large existing customer bases. For example, they can provide Internet access, television and landline or wireless voice communication at a price that is
         lower than if the customer purchased those services separately. In addition, our business relies on the Internet connectivity provided by some of our
         competitors in order to function. See “Risk Factors—Our industry is intensely competitive and if we do not compete successfully, we could lose market
         share, experience reduced revenues or suffer losses.”

                                                                                     147




155 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                                                                                 Marketing

               As one of the largest global communication platforms with a well-known brand, we have benefitted from significant user growth through “viral”
         marketing, by which we mean high levels of word-of-mouth and free media coverage for our products that is driven by, and drives, the size of our global
         network of users. We believe that a significant number of our users have registered for our products based on positive word-of-mouth recommendations
         from other users. Based on third-party surveys, our relative user satisfaction is high and has been improving; we believe user satisfaction for our paying
         users is even higher. These network effects have allowed us to rapidly grow our user base without the same level of marketing and customer acquisition
         expense incurred by many of our competitors. For the three months ended June 30, 2009 to the three months ended June 30, 2010, our average monthly
         connected users increased by 33 million and our average monthly paying users increased by 1.5 million. For the three months ended June 30, 2010, our
         sales and marketing expense was less than 18% of our net revenues. We believe that this viral marketing strategy is sustainable going forward, and will
         allow us to continue to grow our user base with low marketing expense.

               Our global reputation as a leading communications brand has enabled us to generate significant public relations benefit. Since July 2009, there have
         been over 10,000 press articles worldwide mentioning Skype, the majority of which mentioned Skype functionality.

                Given the effectiveness and, we believe, self-reinforcing nature of the network effects created by our large user base, we have, to date, engaged in
         relatively low levels of paid marketing activities. We have historically invested in limited search engine marketing and display advertisements on
         third-party sites across the Internet in order to increase awareness of our products among Internet users, locate new high-value users and seed new
         communities of users. We have also used selective and cost effective promotions to further promote our brand and increase our user base. Historically, our
         promotional efforts included offering free SkypeOut minutes for fixed periods of time and on certain holidays, such as Mother’s Day, so that users could
         use our products on a trial basis. We also recently offered promotions during the weeks around the time of the 2010 FIFA World Cup, where we offered
         free SkypeOut minutes for calls to landlines and, in some cases, mobile phones in countries that qualified for the World Cup.

                While we do not currently advertise on television, we have received extensive coverage through our usage by television networks. Skype has a high
         utility to broadcasters, which can use Skype as a low-cost and high-quality way to conduct remote interviews or report direct from particular locations.
         Consequently, we have entered into contracts with many major U.S. networks (including NBC, CNN and ESPN) and launched a self-service website to
         support media organizations using Skype. Between January and April 2010, we had over 1,500 integrations in news and other programming, including a
         variety of shows featuring an interview component, such as The View. In addition, our strong brand recognition has allowed Skype to be featured in a
         variety of top-rated primetime dramas, such as “CSI” and “Law and Order.” By featuring Skype being used in “practical” settings, we are able both to
         further promote our brand and encourage new users to sign up try our products. Our strategic relationship, including Verizon and Panasonic, have featured
         Skype products in their television commercials.

               Additionally, we have been increasing our marketing efforts to educate our connected users on our paid products and focusing on converting our
         connected users into paying users. We use three main channels of direct communication to market to our existing users: customer emails, in-product
         marketing (that is, the use of a small banner within our client to market particular Skype products to our users) and our website, Skype.com, where users
         come to register, download our software or charge their credit. Going forward, we believe that Skype Home, which is planned for launch in late 2010, will
         enable more advanced targeting and customer relationship management among our existing user base.

                                                                                     148




156 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                                                                              Our Technology

                The core elements of the technology underlying our business are our multi-platform software clients, our peer-to-peer software architecture, and our
         voice and video call quality solution. Our multi-platform software allows us to seamlessly integrate across multiple devices and networks, allowing users
         to install and operate Skype easily on many different devices, such as PCs, laptops, netbooks, tablets smartphones, televisions and video game systems.
         Our peer-to-peer software architecture is designed to facilitate network capacity growth with demand and, as additional fixed-line nodes join, they bring
         additional resources to the peer-to-peer network and improve its overall scale. Lastly, we rely on proprietary technologies, such as high-performance
         audio processing algorithms and versatile audio and video CODECs, to provide our users with the high-quality communication experience that is core to
         our offerings.

                Skype utilizes the Internet to transmit voice and video communications, rather than using a traditional wireline public switched telephone network.
         Voice over Internet Protocol is a method for taking analog audio signals, like the kind you hear when you talk on the phone, and converting them into digital
         data that can be broken down into “packets” and transmitted over the Internet.

               Our software client is available for download or installation onto PCs, mobile devices, consumer electronic devices and business telecom
         platforms. Unlike products of certain of our competitors, our software client is cross-platform (including Windows, MacOS, Apple IOS, Symbian, iPhone,
         Maemo, Google Android and LINUX). Our software clients are also “backwards compatible,” allowing them to interoperate with older versions of Skype.

                We launched the Windows version of our software client in 2003 and our first Apple client, for the Mac, in 2005. We share common technology such
         as our audio and video solution and our network transport across our platforms, and, unlike some of our competitors, this approach has meant that our
         customers are able to communicate easily with customers using other platforms. For example, our users on Windows and Mac platforms are able to make
         voice or video calls to each other or to engage in instant messaging or file sharing with each other. As we have added new platforms, including iOS 4
         (Apple iPhone) and Symbian (mobile phones), Skype Connect and SkypeKit consumer electronics integrations, our technology approach has enabled our
         users to create a single, global network across which they communicate with each other regardless of device. Since the introduction of the iPhone version
         of our software client in April 2009, it has been downloaded over 18 million times.

               Because Skype is a software application, we can launch regular upgrades through user downloads that introduce new features, make improvements
         and correct software errors or “bugs” without requiring a hardware upgrade. Our software upgrade cycle periodically includes major new version releases
         and upgrades. To date, we have been successful in preserving backwards compatibility across these major releases, allowing users of new and older
         versions to continue to communicate seamlessly with each other and avoiding the disruptions often involved in software upgrades. Our more recent
         releases have also included automatic upgrade capabilities that we believe over time will allow us to introduce new features and functions more frequently
         and provide us with additional flexibility as we evolve our technology.

         Voice and Video Call Quality Solution
             •   We believe that audio and video quality is core to the Skype experience. We have an engineering development team focused on innovation and
                 improvement in our audio and video quality.

                 Key elements of our technology include:
                  •    Audio preprocessing. Audio input quality varies widely among consumer microphones and sound processing systems. To address this highly
                       variable environment, we have developed and deployed high-performance proprietary algorithms that allow the Skype client to configure itself
                       automatically to

                                                                                     149




157 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                       http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                    optimize audio performance. Skype’s software client includes features such as automatic gain control, noise reduction and echo cancellation,
                    which are more often provided by custom hardware in the audio conferencing and video conferencing arena. These algorithms, for example,
                    allow Skype users to make a call “hands free” from a laptop or desktop computer without the need for the headsets often required by other
                    solutions.
                •   Audio coding. In addition to supporting industry standard COder-DECoder (codec) technology, Skype has developed a multi-bandwidth super
                    wideband codec called SILK, which Skype is currently seeking to establish as an industry standard. SILK can operate in wide, mid and
                    narrow band modes and can adapt between these modes in operation to enable Skype to adapt to varying network conditions. SILK provides
                    high performance while requiring relatively low bandwidth. We believe SILK is the first codec specifically designed to be an Internet codec
                    for embedded software applications. Skype-commissioned third party tests have confirmed a performance advantage for SILK, as measured by
                    sound quality, resistance to packet loss (which degrades sound quality) and bandwidth efficiency, when compared to other common audio
                    codecs, such as the open source SPEEX codec used in many Internet applications, and the AMR-WideBand codec standardized by the Third
                    Generation Partnership Project, or 3GPP, a mobile industry consortium. We have incorporated SILK into our Windows and Mac versions of
                    our software client, as well as our more recent consumer electronics and mobile versions of our software client such as the iPhone where we
                    recently announced wideband calling over 3G networks.
                •   Quality feedback loop. We monitor both the performance of communications within the Skype community as a whole and call quality
                    specifically, which helps us to identify and resolve problems in a timely manner. The Skype software client is configured to monitor and
                    provide us with data concerning overall performance and call quality. In particular, Skype nodes gather this data and transmit aggregated and
                    anonymous data to our servers, which allows us to adjust signal processing algorithms, user interfaces and device configurations to optimize
                    voice and video call quality.
                •   Device configuration. We have developed automatic device detection and configuration software that manages any issues associated with the
                    setup of our software and user hardware. As a software client, Skype is able to interact directly with the device (PC, Mac, mobile or other
                    consumer electronic device) and as such has a greater degree of access to the device and network than many web-based and other
                    applications. This differentiation allows Skype to detect and configure connected devices and assess where alternate options are available (for
                    example, speakers, microphone, webcam and network interface). Skype can monitor and process data from these devices (for example, by
                    detecting changing network performance) and use this information to enhance voice and video experiences.
                •   Video. Our internally developed core video software component for Internet-based video communications is integrated with the proprietary
                    On2 VP7 video codec and can interoperate with the industry standard H.264 codecs frequently used in consumer electronics devices. In
                    addition, by partnering with webcam original equipment manufacturers (OEMs), we supported the introduction of early consumer webcams
                    providing near broadcast quality video resolution (i.e., VGA 640X480) and have introduced video systems that provide full HD quality
                    resolution (for example, 720P resolution). Our adaptive bandwidth management capabilities allow Skype video to adjust in accordance with
                    available network bandwidth.
                •   Integration. Skype’s audio-video coding integrates with Skype’s network stack, which allows the Skype software client to prioritize
                    dynamically among voice, video and data (instant messaging, file transfer and screen share) in order to enhance user experience, while also
                    adaptively adjusting each of these streams to second-by-second variations in the quality of the network connection and available processing
                    resources on the user’s computing device. This is critical in providing a high-quality (particularly video) experience (regardless of codec) on
                    shared corporate, domestic and public networks.

                                                                                   150




158 of 341                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Network Transport
                Skype has invested substantially in network transport and traversal technologies, with proprietary technology (as well as its own implementations of
         standards) which provide for increased reliability and stability of voice and video connections, improved user experience, ease of connection for users on
         different networks and user security and privacy. These technologies include:
                •    Network transport. The Internet was not originally designed to carry voice and video communication and as a result, packet loss and “jitter”
                     can occur and can severely degrade communications quality when data packets used to transmit digital communications data are lost or
                     delayed in transmission. Skype’s proprietary transport technology, bandwidth management, packet loss and jitter concealment algorithms are
                     designed to help improve reliability and conversation quality even when network performance is impaired, for example, as a result of network
                     congestion, poor wireless performance or interference.
                •    Network traversal. The Internet comprises a large number of interconnected networks owned and operated by different organizations such as
                     telecommunications providers, Internet service providers and public bodies. Establishing a high-quality communications link between two or
                     more Internet users requires that data transitions smoothly from one of these networks to another and requires that it passes through firewalls
                     and similar obstacles. We refer to this requirement as “network traversal.” We have significant experience providing end-to-end connectivity
                     even when endpoints are situated behind firewalls and network address translation (NAT) devices. Even as the percentage of endpoints that do
                     not have publicly routable IP addresses is increasing (due to the proliferation of home routers with NAT), we believe that our ability to make
                     high-quality end-to-end connections between peer nodes is increasing as a result of engineering research coupled with network monitoring. In
                     addition, as carriers and network operators have come under pressure from increasing demand for bandwidth, certain operators have
                     determined to take technical measures to prioritize or de-prioritize certain traffic on their networks. Our network traversal technology includes
                     techniques that we believe may mitigate against attempts to limit availability of bandwidth to Skype users and improve the experience for many
                     of our users when compared with some of our competitors.
                •    Multi-path network traffic delivery. More recently, in video, Skype has been developing and deploying a new “mesh” technology, which is
                     aimed at enabling Skype nodes to negotiate connections across multiple network paths simultaneously. By establishing multiple paths across
                     the peer-to-peer network, we believe the various versions of our Skype software client will be able to better adapt to changing network
                     conditions and to redirect traffic, maintaining voice and video quality, in the event of network degradation. We believe that this technology
                     will be particularly important in differentiating Skype’s group video calling technology from other competitive solutions in our marketplace.
                •    Network security. The Skype software client uses industry standard encryption to provide protection to our users. Communications between
                     Skype users over the peer-to-peer network, whether voice, video, instant messaging or file transfer, are end-to-end encrypted using AES
                     (Advanced Encryption Standard), which we believe is the strongest commercially available encryption technology. In the case of our minority
                     investment to address the Chinese market, where Tom Online is our strategic partner, privacy and protection of data is subject to local law
                     requirements. See “Risk Factors—User concerns about our use and protection of personal data and the privacy of their communication and
                     data protection breaches could harm our brand and our business.”

         Peer-to-Peer Architecture
                Skype’s media streams (and the data communications necessary to locate, connect and communicate between Skype software clients) are made
         across a peer-to-peer network established between Skype software clients. This technology allows Skype to operate at significant scale and to manage the
         integrity of a network that at peak times can include approximately 23 million concurrent users, each of which is considered a “node” in the

                                                                                     151




159 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         network. In this peer-to-peer model, peers can be both suppliers and consumers of resources, in contrast to the traditional client-server or web model
         where only servers supply and clients consume.

                This peer-to-peer architecture means that in order to participate in the network, a Skype software client need only locate and identify another node.
         In order to communicate (for example, make a voice or video call), the peer-to-peer network is used to locate and identify the recipient’s client and a
         peer-to-peer connection is made directly (or with the assistance of another peer) to that computer. No Skype servers or central exchanges are required to
         make this connection. This is a contrast to server-based architecture, where adequate server capacity and connectivity must be available and the relevant
         software client must connect to the server and be connected with another client in order to complete a call. The graphic below illustrates the fundamental
         difference between a peer-to-peer architecture and a centralized server-based architecture.




               As a result of utilizing existing Internet infrastructure and self-regulating network technology, Skype does not require its own physical network to
         make and route calls. When users launch our software client on a network-connected device, their device becomes a peer node on the peer-to-peer
         network. Their device then automatically connects to the computers of other Skype users who are also connected to the network. In some cases, such as
         with many mobile phones, a device does not have the resources (such as CPU, memory and network) necessary to participate as a full peer node. In these
         cases, those devices connect via an installed application “thin client” over a proprietary protocol to Skype-hosted nodes that make up a gateway to other
         peer to peer Skype nodes. Certain nodes may also become connection relays to support calls between users who would otherwise be unable to
         communicate. In addition to connection relays, connections between users depend on certain users’ computers functioning as “super-nodes” that maintain
         information regarding the location of other nodes. Our software client designates connection relays and super-nodes on a dynamic basis based on the
         computing resources of a user’s device. All calls sent via the peer-to-peer network are encrypted from end to end to help ensure that they are secure.

                As new user nodes are added to the peer-to-peer network, the total capacity of the peer-to-peer network also increases. This is not true of traditional
         client-server architectures, which are often bound to fixed ratios, such as a specific number of users, or “clients,” for each server, which is not the case
         with a peer-to-peer architecture. As a result, in traditional architectures, adding more clients generally means having to add server capacity or suffering
         service degradation or outages, which is not the case with peer-to-peer architecture. Other advantages inherent in peer-to-peer architecture compared to
         traditional client-server architecture include:
                •    relatively low capital and operating costs and limited central infrastructure;
                •    less likely to experience network bandwidth bottlenecks; and

                                                                                      152




160 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                 •   large number of nodes limits the impact of any single node failing, which helps improve reliability. Unlike server-based architecture, which is
                     reliant on the continuing operation of its servers, the peer-to-peer architecture will typically continue to function even if there is a single or
                     several points of failure.

               Despite the advantages of the peer-to-peer architecture, there are certain secondary functionalities that may be better met by the use of servers.
         Certain of these functionalities are particularly suited to our Skype for Business users, for example, the ability to track calls among an enterprise’s users
         and the ability to store information while particular clients are not connected to the peer-to-peer network.

                                                                     Product Development and Research

               Skype is constantly investing both to improve and broaden its products and services. Product development expenses amounted to 5.7% of net
         revenues in the pro-forma year ended December 31, 2009. Our product development has a global footprint: we have centers of expertise in Tallinn,
         Estonia (peer-to-peer), Stockholm (for AV), and California (server and partner integration). We also have a small additional product development facility
         in Prague.

               As both our user base and the number of connected devices we are available on have grown, we have been able to rapidly scale our product
         development output and deliver an increasing range of products. For example, we have released Skype products on multiple new mobile platforms
         including iOS (iPhone), Symbian, LINUX, Blackberry and Android devices.

               We are continuing to invest in product development. In particular, we are focusing our development resource in four areas: the continued
         improvement in our audio-visual quality; the ongoing development of server-based functions to supplement and complement the peer-to-peer network; the
         development of Skype Home, which integrates web functionality into our client; and the continued development of Skype platforms for other connected
         devices, particularly mobile.

               First, we continue to invest in our voice and video technology to ensure that our voice and video calling products continue to offer a high quality
         experience for our users. Recent innovations include the introduction or mid- and wideband calling on mobile phones and over 3G networks and the
         introduction of high-definition (720p resolution) video calling from desktop and television clients.

               Second, we are investing to develop Skype software clients. We have designed our next generation Skype Home product, which will integrate more
         web functionality into our software clients. This capability will allow us to potentially integrate a range of rich features including display advertising and
         online gaming, to be accessed and dynamically updated in the Skype software client. Skype is exploring ways to leverage the new Skype Home platform to
         launch new advertising and other indirect products.

               Third, we supplement the peer-to-peer architecture that enables Internet communications between Skype users with our own servers to deliver some
         aspects of our products, such as downloads of the Skype software client by users, user log-in, storage and access of user contact lists, payments and
         subscription management, “friend finders” and contact importers and call quality monitoring to the publicly switched telephone network. Going forward,
         we are continuing to invest in our server network to ensure that we can supplement and complement the peer-to-peer network with additional server-based
         capacity, where appropriate, to ensure that our users’ experience is optimized and they are able to access our full range of communication tools from any
         end device.

               Fourth, we have invested heavily to support our strategy of integrating Skype functionality in communication devices used by people every day,
         particularly in mobile. Following the success of our iPhone

                                                                                       153




161 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         application, which has achieved more than 18 million downloads to date, we are currently focused on delivering applications for other major mobile
         platforms and, in addition to the launch of our 3G enabled iPhone application in May 2010, we have launched nine other mobile clients to date in 2010.

               In addition to the Skype product development efforts described above, where possible we also seek to drive greater penetration and adoption
         without incurring significant additional development costs and resources by encouraging independent third-party manufacturers to develop products that
         embed Skype. In July 2010, we introduced SkypeKit which is a software development tool that enables independent software developers and consumer
         electronics manufacturers to incorporate Skype functionality within their own applications and devices. We have offered SkypeKit for free and it is
         compatible with Linux, Windows and Mac operating systems.

               Following the Skype Acquisition, a 15 person “Skype Labs” research group was founded to focus on applied research. Skype Labs aims to provide
         innovative, research backed innovation to support our strategic objectives. In its first six months, Skype Labs has focused on call quality, audio fidelity and
         research to support the extension of Skype’s platform to new mobile and consumer electronics devices. The achievements of this small team have included
         a new and patent-applied for method for fairness rate control better suited to real time communications than the standard Internet protocol TCP approach.
         The team has also delivered an artificial “bandwidth extension” technique which seeks to reduce listener fatigue when participating in hands-free calls.
         This approach has been in pilot use for some users of version 4.2 of the Windows client.

                                                                             Intellectual Property

                In November 2009, in connection with the Joltid Transaction, we acquired ownership of software and related intellectual property rights, which we
         refer to as the “Global Index.” Global Index is software and related technology that is used, together with other technologies, to facilitate communication in
         a peer-to-peer network. In particular, we acquired from Joltid (a) ownership of Joltid’s intellectual property rights in the Global Index software provided
         to Skype, subject to the license-back to Joltid of certain rights described below, and (b) co-ownership with Joltid of patents covering database systems that
         are distributed across multiple computers for enhanced data storage and retrieval, which is a technology that we use in connection with the peer-to-peer
         architecture enabled by our software. We have the exclusive right to use and enforce these patents in the areas of (i) telephony and/or video
         communications between end users, and (ii) file transfer functionality, instant messaging and e-mail, when used as an ancillary service or application to
         telephony and/or video communications between end users, in each case, regardless of the form or method of communication or access thereto. We granted
         to Joltid a non-exclusive, perpetual, royalty-free license to use, distribute, sublicense and otherwise exploit, solely outside these areas, the Global Index
         software that we acquired from Joltid. For more information on the Joltid Transaction, see “Certain Relationships and Related Party Transactions
         —Acquisition-Related Matters—The Joltid Transaction.”

                As a software company, we regard the protection of our intellectual property rights, including patents trademarks, service marks, copyrights, domain
         names, trade dress and trade secrets, as critical to our success. We seek to protect our intellectual property rights by relying on national, supranational,
         state and common law rights, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our intellectual property
         rights. Our practice is to enter into confidentiality and invention assignment agreements with our employees and contractors. In addition, our agreements
         with third parties include appropriate clauses protecting our intellectual property rights and may include confidentiality agreements to limit access to, and
         disclosure of, our proprietary information. We pursue the registration of our intellectual property rights, such as domain names, patents, trademarks, design
         rights and service marks, in the European Union, the United States and in various other countries. The expansion of our business has caused us to protect
         our intellectual property rights in an increasing number of jurisdictions, which can be expensive and can result in litigation. Certain third parties have
         registered domain names that contain the Skype trademark without our consent, and we aim to

                                                                                      154




162 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         recover those domain names in an efficient and practical manner where appropriate. In addition, the Skype name and other product names are currently the
         subject of trademark opposition proceedings in several countries. See “Risk Factors—We are subject to proceedings that may jeopardize our ability to
         protect the Skype brand.”

               If we are unable to protect our intellectual property rights, or prevent third parties from infringing upon them, it may have a material adverse effect
         on our business. See “Risk Factors—We may be unable to protect and enforce our own intellectual property rights adequately.” In addition, we license
         technology for certain elements and other components of our products from third parties, including the VP7 video compression/decompression technology,
         which we have licensed from On2 (which has subsequently been acquired by Google). The VP7 video compression/decompression technology is used to
         provide high video quality. There can be no assurance that disputes will not arise as to the scope of a relevant license or the terms of our use of a particular
         technology or that the licensed technology or other technology that we may seek to license in the future will continue to be available on commercially
         reasonable terms, if at all. See “Risk Factors—Certain of our technology is licensed from third parties.”

                                                                                   Regulation

         Application of Regulations to Our Business
                The Internet and the ability to communicate over the Internet are relatively recent technological advancements. As a result, it is not always clear how
         existing laws governing issues such as electronic communications generally, copyrights, trademarks and other intellectual property issues, software
         distribution and import/export controls, taxation, data retention, privacy, consumer protection, and law enforcement and national security requirements
         apply to the Internet and Internet communications. Many laws and regulations were adopted prior to the advent of the Internet and related technologies and,
         as a result, do not contemplate or address the specific issues associated with the Internet and related technologies. Laws that do reference the Internet are
         being interpreted by the courts and regulatory agencies, but their applicability and scope remain largely uncertain and are subject to statutory or
         interpretive change.

               The increasing growth and popularity of Internet communications, and growth in the adoption and use of our products, heighten the risk that
         governments will seek to regulate or impose new or increased fees or taxes on Internet communications products, including ours. Due to the unclear and
         evolving nature of laws and regulations and interpretations of such laws and regulations, we cannot be certain that we, our partners or our users are
         currently in compliance with regulatory or other legal requirements in the numerous countries in which Skype is used. Our failure, or the failure of those
         with whom we transact business or to whom we license our software, to comply with existing or future regulatory or other legal requirements could harm
         our business, financial condition and results of operations. Among other things, increased regulatory requirements or taxes on Internet communications
         products may substantially increase our costs, and, as a result, our business may suffer. In addition, if we were required to register or become subject to
         licensing in any jurisdiction as a telecommunications provider, we might also be required to establish a local presence, commercialize our products
         through a local entity or otherwise establish a point of presence for the collection of information required by various local public authorities. Establishing
         a local presence may require us to pay taxes in that jurisdiction where we might otherwise have not been required to do so, and would in any event
         increase our operating costs and would likely significantly harm our results of operations.

         Telecommunications Regulations
               While traditional telecommunications services are subject to various regulatory regimes, we believe that our Internet communications products are
         currently subject to few, if any, of the regulations that apply to traditional telecommunications. The basic Skype software client enables users to create their
         own peer-to-peer communications. The underlying network used is the Internet, which users access via an Internet service provider. The software is made
         available by Skype in Luxembourg, to be downloaded for free from our website.

                                                                                       155




163 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         It can be downloaded by anyone with access to the Internet. Skype does not route or transmit calls and we do not charge for the Skype software. As a
         result, we believe existing telecommunications regulations do not apply to our software.

                Skype also allows, optionally and for a small charge, the user to make outbound calls that terminate in traditional landline or mobile networks. Our
         outbound calling products are achieved through commercial relationships we have with over 90 telecommunications providers worldwide. To make an
         outbound call, the user initiates a call via the Skype software or a private branch exchange (a telephone system within an enterprise switching calls among
         enterprise users, or PBX), which traverses the Internet. A telecommunications provider takes the call from the Internet at its media gateway and routes the
         call via the regular telephone network. The telecommunications providers are responsible for complying with applicable laws and regulations.

               Users are also able, optionally and for a small charge, to receive calls made from telephones connected to traditional landline or mobile networks on
         the Skype user’s PC, PBX or other network-connected device. This one-way inbound product is achieved through the provision of online telephone
         numbers for which we contract with telecommunications providers in 25 markets, and is offered separately from our outbound calling product. From a
         technical perspective, inbound calling works like the outbound calling, but in reverse. The user is provided with an online number and the
         telecommunications provider routes the call to the public Internet to terminate on the user’s Internet connected device. The numbers used remain under the
         administration and control of the telecommunications providers, who are responsible for compliance with numbering rules and providing the underlying
         incoming service in accordance with laws and regulations applicable to them.

               Many existing communications laws and regulations were adopted prior to the advent of the Internet and related technologies, and as a result, do not
         necessarily contemplate Internet communications. In general, they rely on traditional telephony definitional concepts which include two-way services and
         the provision of user phone numbers and emergency calling and which consider whether a company has interconnect agreements with other companies and
         whether a company owns or runs telecommunications equipment or facilities. We believe very few of these definitional concepts apply or should generally
         apply to our suite of products.

               Where there are Internet-specific or technology neutral communications laws and regulations, Internet communications companies are in many cases
         subject to lower, or no, regulatory fees and lesser, or no, specific regulatory requirements as compared to traditional telecommunications providers. The
         level of fees and requirements vary widely from country to country.

               While we operate via the global public Internet from Luxembourg, and for the sub-segment of U.S. based corporate users, from the United States, our
         products are available in almost every country in the world. We believe we operate generally in compliance with applicable Luxembourg and U.S. laws in
         all material respects, but it is not possible to say with certainty that we are in compliance with all laws and regulations in all jurisdictions around the
         world.

                The complicated nature of telecommunications laws and regulations as they apply to our business can be illustrated by the U.S. and the EU regimes.
         In the United States, traditional telecommunications services are generally subject to regulation by the Federal Communications Commission, or FCC, and
         by the individual states. In the United States, regulators have drawn a distinction between “interconnected VoIP services” that operate as a replacement for
         a customer’s primary connection to the phone network and which combine the ability to send and receive calls (“two-way services”) from services that
         unbundle in-bound from out-bound calling and operate as a complement to a consumer’s Internet connection (“one-way services”). The FCC has defined
         “interconnected VoIP services” as those that (1) “enable real-time, two-way voice communications; (2) require a broadband connection from the user’s
         location; (3) require IP-compatible customer premises equipment; and (4) permit users to receive calls from and terminate calls to the public switched
         telephone network (PSTN).” Our outbound and inbound calling products are not offered as a replacement for traditional

                                                                                     156




164 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         phone services, but are offered separately as “one-way” services. While interconnected VoIP service products are considered telecommunications
         services that are subject to FCC regulation in the United States, one-way products, such as ours, are not currently subject to the same regulation as
         “interconnected VoIP services.”

               In the European Union, the regulations of all 27 member countries are based on a set of E.U. directives agreed to by the member states in 2002 and
         revised in 2009. The regulations define “electronic communications services” (“ECS”) as “a service normally provided for remuneration which consists
         wholly or mainly in the conveyance of signals on electronic communications networks, including telecommunications services and transmission services in
         networks used for broadcasting, but exclude services providing, or exercising editorial control over, content transmitted using electronic communications
         networks and services; it does not include information society services, as defined in Article 1 of Directive 98/34/EC, which do not consist wholly or
         mainly in the conveyance of signals on electronic communications network.” In addition, the directives defining ECS also provide for the regulation of
         more traditional telephony services, referred to as Publicly Available Telephony Services (“PATS”). PATS are defined as “a service available to the
         public for originating and receiving national or national and international calls through a number or numbers in a national or international telephone
         numbering plan.”

               Other countries also have laws and regulations applicable to telecommunications companies. Our regulatory position and the status of Internet
         communications products providers under various regulatory regimes are uncertain in many jurisdictions worldwide, and we frequently respond to
         inquiries and requests from regulators about our regulatory status, which can be time-consuming and costly.

         Impact of Telecommunications Regulations
               If we became subject to regulations currently applicable to telecommunications companies, or if similar regulations are imposed on Internet-based
         communications companies like us, we may be required to meet numerous regulatory obligations, which could vary from jurisdiction to jurisdiction,
         including new or enhanced compliance in the following areas:
                •    licensing and notification requirements;
                •    emergency calling requirements, including enhanced emergency calling through multi-line telephone systems;
                •    universal service fund contribution requirements;
                •    lawful interception or wiretapping requirements;
                •    privacy and data retention and disclosure requirements;
                •    limitations on our ability to use encryption technology;
                •    disability access requirements;
                •    consumer protection requirements and local dispute resolution requirements;
                •    requirements related to customer support;
                •    quality of service requirements;
                •    provision of numbering directories;
                •    numbering rules, including portability requirements;
                •    directory and operator services; and
                •    access and interconnection obligations.

               If we are required to comply with communications, e-commerce and other similar laws and regulations, the cost and general impact of compliance
         could be substantial and may require significant investments, including

                                                                                      157




165 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         infrastructure and organizational changes and an increase in headcount. Further, we may become subject to additional local laws and regulations by virtue
         of being subject to telecommunications laws and regulations locally. The cost of compliance may erode or eliminate our pricing advantage over competing
         forms of communication, which is one of our primary competitive advantages, and potentially harm our ability to compete effectively. Any of these effects
         or other effects we do not foresee could harm our business, results of operations and financial condition.

               Like other communications companies, we receive inquiries and requests from law enforcement and other related agencies. To the extent that our
         products or operations are subject to lawful interceptions laws, these interactions raise complicated jurisdictional issues that could subject us to
         conflicting legal obligations especially regarding law enforcement’s rights to receive such data and our users’ privacy rights. Conflicts in this area could
         generate negative publicity that could harm our brand and reputation.

                As a precautionary response to the regulatory framework in certain countries, we have limited localized and offline marketing and sales activities for
         our paid products, such as bill boards or television advertisements. As a result, it may be more difficult, costly or time-consuming for us to market and sell
         our products and we may be unable to compete effectively against other providers that are not subject to similar restrictions. This in turn may make it more
         difficult to attract or retain users or to maintain our brand, which may harm our business or growth prospects. In the future, we may decide to change our
         business model or offer products and services in ways that would make our activities more likely to subject us to telecommunications and other local laws
         and regulations in multiple jurisdictions and the additional associated costs of compliance and the risks of non-compliance.

               In certain countries, such as Brazil, China, South Korea and Taiwan, we rely on our local partner for regulatory compliance, including compliance
         with local telecommunications laws and other applicable laws and regulations. See “Risk Factors—In certain countries, we rely on our local partner for
         regulatory compliance.” For example, our local partner in South Korea (which is a subsidiary of eBay) and our local partner in Taiwan, hold the
         governmental license necessary for them to offer paid products in each of these respective countries. To address the Chinese market, we have a 49%
         interest in Tel-Online Limited, and our majority partner, Tom Online, in practice handles relationships with the local regulatory and law enforcement
         authorities. If our local partners do not ensure that their operations and our products comply with local law and other applicable laws and regulations, we
         may face additional regulation, liabilities or penalties or other governmental action for failure to comply with these laws and regulations, and our brand
         and reputation may be harmed as a result of negative publicity resulting from any such failure. Conversely, if our local partner cooperates with public
         authorities either within or beyond what is required under local regulations, for example, with regard to any action leading to a reduction in users’ privacy
         levels, our brand and reputation may be harmed, in particular in countries such as the United States and E.U. Member States, where perceptions of what are
         acceptable levels of privacy and cooperation with public authorities may differ considerably from that of the country of our partner.

                As part of our initiative to extend the Skype platform, we have begun to license our application programming interfaces, or APIs, and software to
         third parties for development or commercial purposes. Although it would most probably be in breach of our terms and conditions, such third parties may
         offer our products to users in ways that may adversely affect our regulatory positioning, product security, and breach consumer protection, user privacy and
         data protection laws.

                We have built and are in the process of building a business suite of products, tools and features, adjusted to the needs of and aimed at the corporate
         user market. Such business products are provided from Luxembourg, except for the sub-set of U.S. corporate customers, which are provided in the United
         States by Skype Inc., Skype’s Delaware entity. Some of these new products and features may operate in new ways or trigger changes or upgrades in our
         infrastructure, which may increasingly subject us to regulations in one or more jurisdictions.

              Certain countries are reported to have prohibited or blocked access to our website or made the use of one or more of our products illegal. Even
         where our products are reportedly illegal or become illegal, users in those

                                                                                      158




166 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         countries who continue to have access to our website or our software may be able to continue to download, purchase and/or use our products
         notwithstanding the illegality of doing so. We may be subject to penalties or governmental action if consumers continue to use our products in countries
         where it is illegal to do so, and any such penalties or governmental action may be costly and may harm our business.

              We may become subject to these or other regulations and need to comply with numerous requirements, including, among others, those described
         below.

                Emergency Calling. In many jurisdictions, traditional and replacement telephony service providers and some other forms of communications service
         providers are required to provide customers with emergency calling services (such as dialing 911 in the United States or 112 in the European Union) that
         route calls directly to an emergency services dispatcher in the caller’s area. In certain jurisdictions, these emergency calling services obligations also
         include a requirement that the telecommunications provider provide the location of the person making the emergency call. Our products generally do not
         offer emergency calling services. We have voluntarily begun to provide a basic level of emergency calling functionality without location information in the
         United Kingdom, and we may voluntarily offer certain emergency calling services in other jurisdictions in the future. In late 2010 and in 2011, we intend to
         implement a similar voluntary basic level of emergency calling functionality in Australia and certain Nordic countries, and we may voluntarily offer certain
         emergency calling services in other jurisdictions in the future. Where we voluntarily enable this functionality, we are still unable to reliably identify the
         geographic location of the user beyond the country level or to provide detailed caller information, and the user location information is not being provided
         to our carrier partners or emergency call centers in connection with the call.

                Unlike landline phones, where the telephone is located at a fixed address, or mobile phones, which can be located using triangulation of cell towers
         or GPS technology in the handset, we are unable to determine the exact location of a caller who uses our products to make a call over the Internet. Our
         users have the ability to use our products nomadically, meaning that they can log in and use our products from virtually any Internet connection worldwide.
         They can also log in on up to five devices simultaneously at a variety of locations. Although we have the limited ability to identify the registered user using
         our products to make a call (based on information voluntarily provided to us when the user first registered with us or by matching their IP address against a
         thirty party provided global IP address country level database), we cannot determine the actual location from which a call is originated. Additionally, due
         to the inherent nature of transmission via the public Internet we are unable to guarantee completion of any call, including a call to emergency services.

               If we were required to comply fully with all emergency calling service requirements, which vary from jurisdiction to jurisdiction, it would be costly
         and technically and administratively difficult or impossible. Compliance with these regulations may require us to alter or limit our products in certain
         jurisdictions or otherwise change the way we do business in those jurisdictions.

                Universal Service Fund. In certain countries, including the United States, France, Spain, Canada, Australia, India, Hong Kong, Taiwan, South Korea
         and Japan as well as in several states within the United States, the telecommunications regulations allow the authorities to require telecommunications
         providers to contribute to a universal service fund, or USF, that is imposed by law and applied through regulation to facilitate access to
         telecommunications services by all potential users. For example, in the United States, the FCC requires certain telecommunications carriers or
         interconnected voice over Internet protocol providers to contribute a percentage of their interstate revenues to the federal USF. The percentage is adjusted
         periodically, and was 13.6% of interstate revenue as of June 30, 2010. From time to time we have received, and may continue to receive, inquiries from
         regulators relating to the applicability of the USF to our paid products. If we were required to contribute directly to any USFs due to a change in laws or
         regulations or a change in interpretation of current laws or regulations, the cost of providing our products would increase. If we became subject to any such
         laws or regulations, we might seek to collect USF contributions from our customers or alternatively recover increased costs through rates we charge for
         calls; however, that would increase the cost of our products to our customers and could reduce

                                                                                      159




167 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         demand for our products. In addition, if we were required to make USF contributions based upon a change in interpretation of a current regulation, the
         requirements for the contribution might be imposed on us retroactively, in which case we would be unable to recover costs relating to past calls from our
         customers.

               Law Enforcement Assistance. Communications companies are subject to various laws and regulations that require these companies to assist law
         enforcement and intelligence agencies with access to personal and traffic data and lawful interception of communications. The scope of applicability and
         level of sophistication of such regulations vary greatly from country to country. To the extent that our products and operations are or were found to be or
         would become subject to user and traffic data disclosures and lawful interception laws in any jurisdiction, we would need to adapt our systems and
         processes to comply with a variety of requirements on a jurisdiction-by-jurisdiction basis, which can be very costly and technically difficult. Furthermore,
         such requests by law enforcement and other authorities can make us subject to potentially conflicting obligations across jurisdictions. In addition,
         determining whether compliance is legally appropriate in any particular case could require us to exercise judgment and result in improper interpretation
         and application of complex laws. Compliance with legal interception and data disclosure orders may also conflict with certain local laws, including laws
         governing privacy.

               Consumer Protection; Data Retention; Privacy. We are incorporated in Luxembourg and generally subject to Luxembourg data protection laws and,
         in case of U.S.-based business customers, the applicable U.S. data protection laws. We make available on our website our privacy policy, which describes
         how we use, store and disclose our users’ personal and traffic data. Telecommunications companies are subject to various consumer protection statutes, as
         well as data retention, data security and privacy regulations which vary from jurisdiction to jurisdiction. These consumer protection laws include
         requirements such as local dispute resolution mechanisms, performance guarantees for delivery of prepaid services, quality of service and local codes of
         practice to document the conduct of certain business operations or provision of defined services. Further, many countries are in the process of introducing
         or have already introduced into local law the requirement to retain traffic and user data, generally applicable to providers of Electronic Communications
         Services. Retention periods and data types vary from country to country, and the authorities may determine their jurisdiction with respect to such data in
         potentially overlapping and conflicting manners. In addition, certain jurisdictions, such as the European Union and the United States, have new or pending
         privacy legislation that would require notification of consumer data breaches and other privacy protections. While we do not believe that we are required
         to comply with many of these consumer protection, data and privacy requirements applicable to telecommunications providers, complying with these
         various requirements on a jurisdiction-by-jurisdiction basis would impose additional costs on our operations and could be legally, operationally and
         technically difficult.

                Numbering Rules. To provide our number-based products like SkypeIn or Skype To Go, users are provided with an online number and the
         telecommunications providers with which we contract administer and control these numbers. In many jurisdictions, the assignment of such numbers to users
         is subject to various rules and restrictions with regard to the geographic location of the user and planned usage of the number. For example, the assignment
         of numbers may be restricted to residents of a country or an area. Rules determining numbering usage may not address nomadic usage (for example, when a
         user makes calls using our products from different jurisdictions or regions within a country) or Internet communications technologies, such as our products.
         Telecommunications providers that obtain numbers from numbering authorities are generally responsible for their proper use, including when numbers are
         made available to users through commercial arrangements by third parties. Such arrangements may not always be clearly permitted or they may be subject
         to further requirements such as requiring that we establish a local presence or obtain a license. In the jurisdictions where we enable the provision of
         numbers, changes in our agreements with telecommunications providers or changes in the numbering rules or in their interpretation or enforcement could
         lead to restructuring of the business models we apply to contracting of numbers or the suspension or withdrawal of, or limitations to, numbers or
         number-based products in affected markets.

              Numbering Directories and Number Portability. Depending on the jurisdiction and type of communication service provided, telecommunications
         companies that allocate numbers may be subject to requirements to allow

                                                                                     160




168 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         users to have their number listed in publicly available numbering directories and, for that purpose, collect and provide certain user data and make it
         available to providers of directory inquiry services and/or publish it themselves. We do not make user data available for this purpose. Further,
         telecommunication companies may be required to allow users to transfer their numbers to a new provider upon a user’s request to enable the user to switch
         service providers while keeping their old number. Currently, we allow users to transfer their SkypeIn number to a new provider, but do not provide for the
         transfer by a user of another provider’s number for use as their SkypeIn number. If we were required to implement such measures and services, we might
         be dependent on our numbering partners, and the implementation of such measures and services could be technically, commercially or operationally
         difficult and impose additional costs on our operations.

         Other Regulations
               Taxes. In countries outside of the European Union, we do not collect or remit value-added tax (VAT) (except that we remit VAT to Switzerland, as
         discussed below). Some countries outside of the European Union may, however, require us to collect and remit VAT, which could be burdensome or
         expensive for us to administer and increase the costs of our products or adversely affect our results of operations. For example, tax authorities in
         Switzerland have notified us that we should collect and remit VAT from our users with a Swiss billing address. At present, we remit VAT to Switzerland,
         but we do not collect the VAT from our users with billing addresses in Switzerland, and as a result we absorb the cost of VAT, which affects our results of
         operations.

                At present, the subsidiary through which we market and sell most of our products, Skype Communications, does not collect or remit U.S. state or
         municipal taxes (such as sales, excise, utility, use or ad valorem taxes), fees or surcharges in respect of sales to our U.S. customers. However, we
         occasionally receive inquiries from a small number of state and municipal taxing authorities seeking payment of taxes, fees or surcharges that are
         traditionally applied to, or collected from, customers of providers of traditional public switched telephone network services. In addition, U.S. federal
         regulators have inquired into whether Skype properly remits payments to the federal universal service fund.

               With respect to a U.S. state’s ability to impose obligations to collect taxes, fees or surcharges with respect to sales made over the Internet, the U.S.
         Supreme Court’s decision in Quill Corporation v. North Dakota currently requires that a taxpayer have a physical presence within the state before the state
         can collect such taxes. However, the U.S. Supreme Court has provided little guidance as to what levels of contacts constitute a physical presence, and no
         assurance can be given that we will not be found to have a physical presence in certain U.S. states based on, for example, our affiliations with other
         businesses that have a physical presence in the state.

                Furthermore, a number of states, as well as the U.S. Congress, have been considering or have adopted initiatives that could limit the Supreme Court’s
         position regarding sales and use taxes on Internet sales. If these initiatives are successful, we could be required to collect sales and use taxes in a number
         of states or change our business practices. The imposition by state and local governments of various taxes, fees and surcharges upon Internet commerce
         could result in administrative burden, put us at a competitive disadvantage if similar obligations are not imposed on all or substantially all of our online
         competitors and affect negatively our future sales.

                In addition, several proposals have been made at the U.S. federal, state and local levels that would impose additional taxes on communications
         through the Internet. These proposals, if adopted, could substantially impair our growth and substantially increase the costs of our products. In particular,
         the tax status of our products could subject us to conflicting taxation requirements and complexity with regard to the collection and remittance of VAT,
         sales or use taxes. Furthermore, given the international nature of our business, we may incur significant costs in developing and modifying our
         technological and administrative systems to enable us to collect and remit taxes in such a manner that applies only to the relevant taxable activity.

               Any of these developments could adversely affect our results of operations.

                                                                                      161




169 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               Regulation on Import, Export and Distribution of Highly Encrypted Technologies. In some countries, the export, import and distribution (online
         and offline) of highly encrypted technologies such as our software client are subject to licenses, authorizations or permissions by relevant local authorities
         which we may be required to obtain and which we have in the past been requested to obtain. In 2006, we obtained an authorization from the U.S.
         Department of Commerce for the export of Skype software. In 2005, the Luxembourg competent authority (Office des licences) confirmed that the Skype
         software benefits from an authorization exemption for the export of the software.

                Disabilities Access Regulations. In some jurisdictions, website and software providers are subject to various rules to ensure that they are
         sufficiently accessible to people with disabilities, such as visual impairment. These rules are designed generally to ensure that people with disabilities can
         access the features of websites or software in a functionally equivalent manner as compared to people without disabilities.

               Financial Services Regulations. Our customers purchase online prepaid credits to buy and use our paid-for products, which we refer to as Skype
         Credit. If existing laws and regulations that apply to currencies, currency issuing activities or electronic money (e-money) were interpreted by regulators to
         apply to Skype Credit or us, or if new laws or regulations were adopted that would cause Skype Credit to be regulated as a currency, e-money or financial
         service generally or if we were regulated as an electronic money lending institution, we could be required to comply with those laws and regulations and
         any such compliance may be costly. For example, if Skype Credit were regulated as a currency or as e-money or if we were regulated as an electronic
         money lending institution or credit issuer, we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which
         may be dependent on our meeting certain capital and other prudential requirements; we may be subject to additional oversight of our business; and we may
         be required to comply with conduct of business rules, including disclosure requirements and anti-money laundering and know-your-customer rules, all of
         which could significantly increase our operating costs.


                                                                                  Employees

               As of June 30, 2010, we had approximately 788 employees. In addition, we had 51 long-term contractors supporting us across all areas of the
         business. In accordance with local law, an employee delegation exists in Luxembourg, which has the right to approve changes to working conditions of our
         Luxembourg employees. None of our employees and contractors is subject to a collective bargaining agreement. We have 308 people in product
         development, 260 people in sales and marketing, 48 people in site operations, 65 people in customer support and 158 people in general and administrative
         functions. The table below shows the breakdown of our people by region as of June 30, 2010, and provides an indication of the primary functions
         undertaken in such region.

                                                                                                      Number of employees
         Country / Region                                                                               and contractors             Primary function
         Estonia                                                                                              365                   Product Development
         United Kingdom                                                                                       237                   Sales and Marketing
         United States                                                                                         92                   Sales and Marketing
         Luxembourg                                                                                            56                   General and administration
         Sweden                                                                                                35                   Product Development
         Czech Republic                                                                                        31                   Product Development
         Asia Pacific                                                                                          23                   Sales and Marketing
         Total                                                                                                839

                                                                                      162




170 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                                                                                   Facilities

               On February 17, 2010, we entered into a nine-year lease with M Immobilier S.A. for approximately 25,000 square feet of office space as our
         headquarters in Luxembourg. We have, at our sole discretion, an option to terminate this lease at the end of the third and sixth years. In June 2010, we
         signed a lease with Stanford University for a 90,000 square foot office space in the Stanford Research Park, Palo Alto, California, which will house
         engineers in addition to regional marketing, business development, and the Skype for Business team. The lease expires in September 2017, and may be
         renewed for an additional five years. We lease approximately 50,000 square feet of space in our primary engineering and development facility in Tallinn,
         Estonia and this lease is governed under a five-year term ending in September 2013. On January 15, 2010, we signed a lease with Dominion Corporate
         Trustees Limited and Dominion Trust Limited, for office space in London, United Kingdom. The lease expires in May 2016.

              We lease additional offices in Tartu, Estonia; London, United Kingdom; Brisbane, CA, United States; San Jose, CA, United States; Luxembourg,
         Luxembourg; Stockholm, Sweden; Prague, Czech Republic; Tokyo, Japan; Central, Hong Kong; and Manama, Bahrain.


                                                                  Corporate Structure and Reorganization

              Our principal executive office is located at 22/24 Boulevard Royal, 6e étage, L-2449 Luxembourg, and our telephone number at this address is +352
         2663 9130. Our corporate website is www.skype.com. Information on, or accessible through, our website is not a part of, and is not incorporated into, this
         prospectus.

               All of our operations are conducted through various subsidiaries, which are organized and operated according to the laws of their country of
         incorporation.

               Prior to this offering, we have conducted our business through Skype Global S.à r.l., a Luxembourg limited liability company (société à
         responsabilité limitée), and its subsidiaries. The registrant, Skype S.à r.l., a Luxembourg limited liability company (société à responsabilité limitée) was
         formed for the purpose of making this offering. Skype S.à r.l., currently a wholly-owned subsidiary of Skype Global S.à r.l., does not engage in any
         operations and has only nominal assets, including a 100% interest in Skype Global Holdco S.à r.l., a Luxembourg limited liability company (société à
         responsabilité limitée), which itself does not engage into any operations and holds no material assets. The corporate reorganization will involve, among
         other steps, the conversion of Skype S.à r.l. into a Luxembourg joint stock company (société anonyme), Skype S.A., and the acquisition of the shares of
         Skype Global S.à r.l. by Skype S.A. as further described in “Corporate Reorganization.” Investors in this offering will only receive, and this prospectus
         only describes the offering of, ADSs representing ordinary shares of Skype S.A.


                                                                              Legal Proceedings

               We are subject to ordinary routine legal and regulatory proceedings, other disputes and regulatory inquiries incidental to our business. The number
         and significance of these proceedings, disputes and inquiries are likely to increase in the future. In particular, in addition to the matters described below,
         we are involved in other legal proceedings and disputes with third-parties claiming that we have infringed their patents or other intellectual property rights,
         and we expect that, like other technology companies, we will increasingly be subject to patent infringement and other intellectual property litigation and
         claims in the future.

               Any proceedings, claims or regulatory actions against us, whether meritorious or not, may be time consuming, result in significant legal expenses,
         require significant amounts of management time, result in the

                                                                                      163




171 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         diversion of significant operational resources, require changes in our methods of doing business or our products that could be costly and technically
         difficult (or perhaps impossible) to implement, reduce our net revenues, increase our expenses, require us to make substantial payments to settle claims or
         satisfy judgments, require us to cease conducting certain operations or offering certain products in certain areas or generally, and otherwise harm our
         business, results of operations, financial condition and cash flows, perhaps materially.

         Administrative Subpoena
                On July 30, 2010, an administrative subpoena from the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) was received by one
         of our shareholders, Silver Lake, requesting information regarding transactions that Skype has conducted involving Iran since August 1, 2005, including a
         certain number of identified transactions relating to call termination fees to an Iranian telecommunications provider. Upon Silver Lake’s receipt of this
         subpoena, we initiated an internal review of our transactions involving Iran and we are in the process of preparing our response to the subpoena. Our
         review is at a preliminary stage. Skype intends to cooperate fully with the OFAC in responding to the subpoena and any additional requests. While it is too
         early to predict the ultimate outcome of the OFAC review, should the OFAC determine that our activities involving terminating calls in Iran constituted
         violations of U.S. sanctions regulations in some manner, civil penalties, including fines, could be assessed against the Company.

         Net2Phone
               In June 2006, Net2Phone, Inc. filed a lawsuit in U.S. Federal District Court in New Jersey alleging that eBay Inc., Skype Technologies S.A. and
         Skype Inc. infringed various patents owned by Net2Phone relating to Internet communications technology. We and our former parent, eBay, filed an answer
         and counterclaims asserting that the patents are invalid, unenforceable and were not infringed.

               In February 2008, eBay filed a patent infringement action against IDT, Net2Phone’s parent, in the Western District of Arkansas.

               On August 4, 2010, Skype and eBay entered into a settlement agreement with Net2Phone, Inc. and related parties in settlement of all outstanding
         disputes among the parties.

                In connection with the resolution of such litigation, eBay granted us an option to purchase certain patents for a period of one year until August 4,
         2011. The purchase price of the option was $2 million. Should we decide to purchase the patents, we and eBay will negotiate the purchase price in good
         faith, and the $2 million option price will be applied to the purchase price of the patents. During the period that the option is valid for, eBay can license the
         underlying patents but is not permitted to not sell, transfer, dispose or other encumber them.

         Credit Expiration Matters
               On March 12, 2010, we settled two U.S. federal class action cases arising from our credit expiration policy. See Note 15 to our audited consolidated
         financial statements included elsewhere in this prospectus for more information describing these class action cases. The settlement did not have a material
         impact on our operations. As part of the settlement, we agreed to revise our terms of service, effective January 1, 2010, to allow users the ability to
         reactivate credits that have gone inactive following 180 days of inactivity, which previously were forfeited by a user. For further information of our
         deactivation policy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies,
         Judgments and Estimates—Revenue Recognition.”

                                                                                       164




172 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                                                                                 MANAGEMENT

               Set forth below are the names, ages as of June 30, 2010, and positions of our existing directors and our executive officers. We expect to have a
         reduced board composition following the completion of our corporate reorganization.

         Name                                               Age       Position
         Josh Silverman                                               Director and Chief Executive Officer
         Adrian T. Dillon                                             Chief Financial Officer
         Neal Goldman                                                 Chief Legal and Regulatory Officer
         Neil Stevens                                                 Vice President and General Manager for Consumer
         David Gurlé                                                  Vice President and General Manager for Skype for Business
         Miles Flint                                                  Chairman of the Board of Directors
         James A. Davidson                                            Director
         Egon Durban                                                  Director
         Charles Giancarlo                                            Director
         Simon Patterson                                              Director
         John Donahoe                                                 Director
         Robert H. Swan                                               Director
         Nicholas Staheyeff                                           Director
         Marc Andreessen                                              Director
         Ben Horowitz                                                 Director
         Alain Carrier                                                Director
         Erik Levy                                                    Director
         M.F.A. Mulder Beheer B.V.                                    Director
         Joltid Limited                                               Director
         Norbert Becker                                               Director
         Jean-Louis Schiltz                                           Director

         Background of Current Executive Officers and Directors
               Josh Silverman is Director and Chief Executive Officer and began his tenure as Director in November 2009 and Chief Executive Officer in March
         2008 respectively. Mr. Silverman has helped build several start-ups to become world-class brands and companies. He joined Skype from Shopping.com,
         where he served as Chief Executive Officer. Prior to that, he launched eBay’s European online classifieds business, and built it into the pan-European
         leader through a combination of acquisitions and organic growth. Under his management, Marktplaats.nl, the leading Dutch eCommerce business, grew its
         web traffic, revenues and profits. Mr. Silverman was co-founder and Chief Executive Officer of Evite, the social event planning site on the Web, which he
         led until its sale to Ticketmaster/Citysearch (now IAC) in 2001. He has also held management positions at ADAC Labs, was a Senior Consultant at Booz
         Allen & Hamilton and started his career on the staff of U.S. Senator Bill Bradley. He graduated magna cum laude from Brown University and holds an
         M.B.A from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar and elected Co-President of his class.

               Adrian T. Dillon is our Chief Financial and Administration Officer and began his tenure in March 2010. Mr. Dillon joined Skype from Agilent, the
         world’s premier measurement company, where he served as Executive Vice President, Finance and Administration and Chief Financial Officer. Prior to
         Agilent, Mr. Dillon spent 22-years at Eaton Corporation, an Ohio-based diversified industrial manufacturer. There he held a variety of positions, joining as
         senior economist, moving to Chief Financial Officer and Executive Vice President during his tenure. He is also on the Board of Williams-Sonoma, Inc,
         where he chairs the Audit and Finance committee. He graduated summa cum laude from Amherst College with a B.A. in Economics.

              Neal Goldman is our Chief Legal and Regulatory Officer and began his tenure in June 2010. Prior to that, he was the Executive Vice President, Chief
         Administrative and Legal Officer and Secretary of 3Com Corporation

                                                                                     165




173 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         from 1997 to 2003, when 3Com was acquired by HP. At 3Com he headed up the legal department, acted as corporate secretary and directed 3Com’s
         intellectual property program as well as IT, security, environmental, health and safety (SEHS); worldwide real estate and site services (WRESS). Prior to
         that he was employed at Polaroid Corporation from 1997 to 2003 where he served as Executive Vice President Business Development and Chief Legal
         Officer. Prior to that he was the general counsel of Lotus Development Corporation and worked at Data General Corporation primarily doing international
         legal work. Mr. Goldman holds a bachelor’s degree and a law degree from Suffolk University in Boston, MA.

               Neil Stevens is our Vice President and General Manager for Consumer and began his tenure in April 2009. Prior to joining Skype, Mr. Stevens
         worked at a number of major technology companies in senior product, marketing and e-commerce roles, most recently as general manager for Europe of the
         Apple Online Store. He was general manager of Dell’s European e-Commerce business and before that Marketing Director for Dell’s Home and Small
         Business in Europe. He was also Tiny Computer’s first Product & Marketing Director, and worked for Intel, and AT&T-NCR, where he started his career.
         Mr. Stevens is a graduate of Bradford University where he studied Computing & Information Systems.

               David Gurlé is our Vice President and General Manager for Skype for Business and began his tenure in January 2010. Before joining Skype,
         Mr. Gurlé worked for Thomson Reuters, where he served as its Global Head of Collaboration Services and Head of the Sales & Trading Business
         Division in Asia. He spent more than three years running Microsoft’s Real Time Communications business, a group that he founded. While at Microsoft, he
         co-authored several Internet Engineering Task Force standards for presence and instant messaging for SIP. Prior to Microsoft, he was Corporate Vice
         President, Business Alliances at VocalTec, the IP telephony pioneer, where he established and managed partnerships with a number of Tier I
         telecommunications service providers and hardware vendors, including Deutsche Telekom, France Telecom and Marconi. Mr. Gurlé graduated from Ecole
         Supérieure d’Ingénieurs with a M.Sc. in Computer Science and Telecommunications.

                 Miles Flint is a Director and began his term in December 2009. After obtaining a degree in Chinese from the University of London, Mr. Flint’s early
         career was spent in the pharmaceutical and heavy engineering industries. In 1980 and 1981, he studied for an MBA at the Cranfield School of Management
         and then joined the UK computer manufacturer, ICL, where he first gained general management experience. In 1991, he joined Sony where he held a
         number of positions in the UK and Europe which culminated in his becoming President of Sony Ericsson Mobile Communications in 2004, which he held
         till the end of 2007. Since 2008, Mr. Flint has held a number of advisory and board roles in companies such as Sony Corporation, Silver Lake, Sharpcards
         Limited, Global Collect Bidco BV, Research in Motion (UK) Ltd and Milescapes Limited.

               James Davidson is a Director and began his term in December 2009. Mr. Davidson is Co-Chief Executive Officer of Silver Lake, which he
         co-founded in 1999. He has been an active advisor to, and investor in, the technology industry for more than 25 years. Prior to Silver Lake, Mr. Davidson
         was a Managing Director at Hambrecht & Quist, a technology-focused investment bank and venture capital firm (now part of JP Morgan Chase & Co.).
         Mr. Davidson managed several businesses at Hambrecht & Quist, including the Technology Investment Banking business and the Mergers and Acquisitions
         business. Prior to Hambrecht & Quist, Mr. Davidson was a corporate-securities attorney for Pillsbury, Madison & Sutro. Mr. Davidson also serves on the
         boards of Flextronics International Ltd. and Avago Technologies Limited. Previously, he was a director of Seagate. Mr. Davidson also serves on the
         boards of a number of non-profit organizations. He holds a B.S. from the University of Nebraska and a J.D. from the University of Michigan.

               Egon Durban is a Director and began his term in November 2009. Mr. Durban is a Managing Director of Silver Lake based in Menlo Park.
         Mr. Durban joined Silver Lake in 1999 as a founding principal and has worked in the firm’s Menlo Park, London and New York offices. Mr. Durban
         serves on the Board of Directors of NXP Semiconductors N.V., on the Board of Directors of Intelsat, Ltd., on the Operating Committee of SunGard Capital
         Corporation and on Silver Lake’s Management, Investment, and Operating and Valuation Committees. Prior to Silver Lake, Mr. Durban worked as an
         associate in Morgan Stanley’s Investment Banking Division. Mr. Durban graduated from Georgetown University with a B.S. in Finance.

                                                                                     166




174 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               Charles Giancarlo is a Director and began his term in December 2009. Mr. Giancarlo joined Silver Lake in 2007 as a Managing Director and
         Co-Head of Value Creation. Mr. Giancarlo has over 25 years of experience in the communications industry. A senior executive at Cisco Systems from
         1993-2007, Mr. Giancarlo most recently served as Executive Vice President and Chief Development Officer of Cisco and President of Cisco-Linksys,
         leading the company’s overall product development and management activities. Mr. Giancarlo joined Cisco when the company acquired Kalpana, Inc., the
         pioneer in Ethernet switching, where he was Vice President of Marketing and Corporate Development. Prior to joining Cisco, Mr. Giancarlo founded four
         communications equipment companies and successfully sold two of them to larger companies. Mr. Giancarlo was interim CEO of Avaya in 2008 and is
         currently Chairman of the Board. In addition, he serves on the board of directors of Accenture and Netflix, Inc. Mr. Giancarlo holds a B.S. degree in
         Electrical Engineering from Brown University, an M.S. degree in Electrical Engineering from the University of California at Berkeley, and an M.B.A. from
         Harvard University.

               Simon Patterson is a Director and began his term in December 2009. Mr. Patterson is a Director of Silver Lake having joined in 2005. Prior to
         Silver Lake, he worked at General Atlantic Partners and at GF-X, the leading air cargo distribution system provider, where he was a member of the
         founding management team. He previously worked at the FT Group and at McKinsey & Company. Mr. Patterson also serves on the board of Gerson
         Lehrman Group, Inc. Mr. Patterson holds an M.A. from King’s College, Cambridge University and an M.B.A. from the Stanford University Graduate
         School of Business.

                John Donahoe is a Director and began his term in November 2009. Mr. Donahoe is the President and Chief Executive Officer of eBay. He has served
         in that capacity since March 2008, and as a director of eBay since January 2008. From January 2008 to March 2008, Mr. Donahoe served as the CEO
         designate of eBay. From March 2005 to January 2008, Mr. Donahoe served as President, eBay Marketplaces. From January 2000 to February 2005,
         Mr. Donahoe served as Worldwide Managing Director for Bain & Company, a global business consulting firm. Mr. Donahoe serves on the Board of
         Trustees for Dartmouth College and on the board of directors of Intel Corporation. Mr. Donahoe holds a B.A. in Economics from Dartmouth College and
         an M.B.A. degree from the Stanford Graduate School of Business.

               Robert H. Swan is a Director and began his term in December 2009. Mr. Swan serves eBay as Senior Vice President, Finance and Chief Financial
         Officer. He has served in that capacity since March 2006. From February 2003 to March 2006, Mr. Swan served as Executive Vice President and Chief
         Financial Officer of Electronic Data Systems Corporation, a technology services company. From July 2001 to December 2002, Mr. Swan was Executive
         Vice President and Chief Financial Officer of TRW Inc. Mr. Swan served in executive positions at Webvan Group, Inc. from 1999 to 2001, including Chief
         Executive Officer from April 2001 to July 2001, Chief Operating Officer from September 2000 to July 2001, and Chief Financial Officer from October
         1999 to July 2001. Mr. Swan also serves on the board of directors of Applied Materials Inc. Mr. Swan holds a B.S. from the State University of New York
         at Buffalo and an M.B.A. from State University of New York at Binghamton.

               Nicholas Staheyeff is a Director and began his term in February 2010. Mr. Staheyeff serves eBay International AG as Vice President, Chairman,
         Chief Executive Officer and Chief Financial Officer. He has been with eBay since December 2005. From May 2002 to November 2005, Mr. Staheyeff
         served as Assistant Vice President and Corporate Controller for Nestlé, the world’s largest food company. Prior to this, after starting his career in public
         accounting, Mr. Staheyeff held executive positions in finance and general management across the globe, including with Coca-Cola. Mr. Staheyeff serves on
         the Board of Directors of the Direct Marketing Association (a global trade association). Mr. Staheyeff holds a B.A. in Economic History from Exeter
         University, U.K. and is an Associate Member of the Institute of Chartered Accountants of England & Wales.

                Marc Andreessen is a Director and began his term in December 2009. Mr. Andreessen is a co-founder and general partner of Andreessen Horowitz,
         the venture capital firm. He has served as a director of eBay since September 2008. Mr. Andreessen is a co-founder and chairman of Ning Inc., an online
         platform for people to create their own social networks that was founded in late 2004. Mr. Andreessen cofounded and served as the Chairman of the board
         of directors of Opsware, Inc. (formerly known as Loudcloud Inc.). He also served as

                                                                                     167




175 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Chief Technology Officer of America Online, Inc. Mr. Andreessen was a co-founder of Netscape Communications Corporation, a software company,
         serving in various positions, including Chief Technology Officer and Executive Vice President of Products. Mr. Andreessen currently serves on the board
         of directors of Hewlett-Packard Company and Facebook Inc. Mr. Andreessen holds a B.S. degree in Computer Science from the University of Illinois at
         Urbana-Champaign.

                Ben Horowitz is a Director and began his term in November 2009. Mr. Horowitz is a co-founder and general partner of Andreessen Horowitz, a
         venture capital fund. He was also a co-founder and Chief Executive Officer of Opsware (formerly Loudcloud), which was acquired by the Hewlett-
         Packard Company in 2007, and Mr. Horowitz was then appointed Vice President and General Manager of Business Technology Optimization for Software
         at the Hewlett-Packard Company. Prior to that, he was Vice President and General Manager of America Online’s E-commerce Platform division, where he
         oversaw development of the company’s Shop@AOL service. Mr. Horowitz also ran several product divisions at Netscape Communications. Horowitz
         also served as Vice President of Netscape’s Directory and Security product line. Before joining Netscape in July 1995, he held various senior product
         marketing positions at Lotus Development Corporation.

                Alain Carrier is a Director and began his term in November 2009. Mr. Carrier is the Managing Director of CPPIB and leads the Private Investments
         department in Europe. Based in London, he also assists in the overall development of CPPIB’s activities in the broader Europe, Middle East and Africa
         region. Mr. Carrier has more than 15 years of financial industry experience. Prior to joining CPPIB, he was Managing Director at Goldman, Sachs & Co. in
         their Investment Banking division in New York and London. Prior to that, he was an Associate at the New York-based law firm, Sullivan & Cromwell
         LLP. He holds a Bachelor of Law from Laval University in Quebec City, a Masters in Law (D.E.S.S.) from the Sorbonne in Paris and a Masters in Law
         from Columbia University.

               Erik Levy is a Director and began his term in December 2009. Mr. Levy is a Principal with CPPIB where he has led a variety of private equity
         investments. Since joining CPPIB in 2005, Mr. Levy has focused on investments in several industries including Consumer, Healthcare and
         Telecommunications. Previously, Mr. Levy was a management consultant with Bain & Company in Toronto and Paris. Prior to that, Mr. Levy was part of
         the pension consulting practice at William M. Mercer. Erik holds an MBA from the Rotman School of Management at the University of Toronto and a B.Sc.
         in Actuarial Mathematics from Concordia University.

              M.F.A. Mulder Beheer B.V. is a corporate director and began its term in April 2010. Mark Dyne is the sole corporate director of M.F.A. Mulder
         Beheer B.V.

               Mark Dyne was one of the first investors in Skype, serving as a director from the founding of Skype until its sale to eBay in 2005. Mr Dyne is
         currently the Managing Director of M.F.A. Mulder Beheer B.V., and is a director representative of M.F.A. Mulder Beheer B.V. and Joltid Limited on
         Skype. Mr. Dyne founded and currently serves as the Chairman, Chief Executive Officer and Managing Director of Europlay Capital Advisors, LLC, a
         merchant banking and advisory firm. Mr Dyne is currently the Chairman of Atomico Ventures, a venture capital fund. Mr Dyne serves as a director of
         Atrinsic, Inc., and Talon, Inc., both publicly listed companies, and on the Board of Directors of Rdio, Inc., and a number of other privately held companies.
         Mr. Dyne previously served as Chairman and Chief Executive Officer of Sega Gaming Technology Inc. (USA), and Chairman and Chief Executive Officer
         of Virgin Interactive Entertainment Ltd. Mr Dyne was a founder and director of Packard Bell NEC Australia Pty. Ltd., and he was a founder, Chief
         Executive Officer and former director of Sega Ozisoft Pty Ltd.

               Joltid Limited, a British Virgin Islands limited company, is a corporate director and began its term in April 2010. Joltid Limited is a wholly owned
         subsidiary of Clufa Holdings Limited. The Guardian Trust Company Limited is the trustee of the Nimbus Trust and The Journey Trust. By virtue of its
         position as trustee of these trusts, the Guardian Trust Company Limited has sole voting and dispositive control over Clufa Holdings Limited.

                                                                                     168




176 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Niklas Zennström’s family members are the sole beneficiaries of the Nimbus Trust and Janus Friis’s family members are the sole beneficiaries of The
         Journey Trust. Niklas Zennström and Janus Friis each own 15% of Joltid Limited directly.

               Janus Friis is a director representative for Joltid Limited and M.F.A. Mulder Beheer B.V. Mr. Friis is an entrepreneur and investor, who co-founded
         Skype and a series of other technology companies such as Kazaa, Joost, Joltid and, most recently, Rdio. As co-founder of Skype, he served on the board of
         Skype and as one of its initial executives. He is also co-founder of Atomico Ventures, a venture capital firm. He started his career at CyberCity, a Danish
         Internet service provider (ISP), in 1996 and went on to Tele2 where he was part of launching get2net, an ISP, and everyday.com, a web portal. Mr Friis
         resides in London.

                Niklas Zennström is a director representative for Joltid Limited and M.F.A. Mulder Beheer B.V. Mr. Zennström is an entrepreneur and investor, who
         co-founded and managed Skype and a series of other technology companies such as Kazaa, Joost and Joltid. Currently, he is CEO and Founding Partner of
         Atomico Ventures, a venture capital fund. As co-founder of Skype, he served as CEO and on the board of Skype, and has served as CEO of Kazaa, Joltid
         Limited, and a number of other technology companies. Before following his entrepreneurial ambitions, Mr. Zennström was CEO of the European portal,
         everyday.com, and he began his professional career at Tele2, a phone company in Europe. He currently sits on the boards of Atomico, Fon, Jolicloud, and
         Rdio. He holds dual degrees in Business and MSc Engineering Physics/Computer Science from Uppsala University in Sweden, and spent his final year at
         the University of Michigan. Mr. Zennström co-founded Zennström Philanthropies, which is actively involved in combating climate change, improving the
         state of the Baltic Sea and encouraging social entrepreneurship.

                Norbert Becker is a Director and began his term in November 2009. Mr. Becker is Chairman at Atoz Tax Advisors Luxembourg. He has held various
         senior executive positions in Andersen Worldwide and Ernst & Young Global and was appointed Global Chief Financial Officer of Ernst & Young. In
         2007, he was one of the co-founders of Compagnie de Banque Privée, a private bank incorporated in Luxembourg, and serves as Chairman. He is involved
         with a number of international private equity firms, such as Edmond de Rothschild Group and Mangrove Capital Partners. He also serves on the board of
         BIP Investment Partners, a public investment firm based in Luxembourg, and is the Managing Director of IntesaSanPaolo International Holdings, which is
         wholly owned by IntesaSanpaolo. Mr. Becker earned a doctor honoris causa degree from Sacred Heart University, Fairfield, Connecticut and is a Trustee
         of the University.

                Jean-Louis Schiltz is a Director and began his term in January 2010. From 2004 to 2009, Mr. Schiltz was a member of the Luxembourg Government
         as Minister for Defence, International Cooperation as well as Media and New Technologies. He is currently a member of the Luxembourg Parliament. He
         was a lecturer in civil and commercial law at the Universities of Paris I (Panthéon-Sorbonne) and Luxembourg. He is also the author of a number of
         articles in the area of commercial and banking law. Mr. Schiltz holds a post-graduate degree in business law (diplôme d’études approfondies en droit des
         affaires) and a Master’s degree in business law (maîtrise en droit des affaires) from the University of Paris I (Panthéon-Sorbonne). He was admitted to
         the Luxembourg Bar in 1989.

               There are no family relationships between any of our executive officers or directors. The business address of each of our executive officers and
         directors is 22/24 Boulevard Royal, 6e étage, L-2449 Luxembourg.

         Composition of our Board of Directors
               The persons serving on our board of directors are designated pursuant to the terms of the Shareholders Agreement, as it may be amended, among our
         current investors (other than management) and us, executed in connection with the closing of the Skype Acquisition. Under Luxembourg law, directors must
         be elected by our shareholders at a general meeting. We and our existing shareholders expect to amend the Shareholders Agreement (which will govern,
         among other things, the composition of the board of directors of Skype S.A.), prior to the offering.

                                                                                    169




177 of 341                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               Together,         ,         and        may be considered to form a “group” that owns more than 50% of our outstanding voting securities and we
         believe we are considered a “controlled company” within the meaning of the Nasdaq Stock Market rules. Such entities forming the group will file
         appropriate notices of beneficial ownership as a group on Schedule 13D or Schedule 13G, as applicable, with the SEC once we become a registrant.
         Following the consummation of this offering, we expect to remain a “controlled company” and we intend to rely upon the “controlled company” exception
         under the Nasdaq Stock Market rules. Pursuant to this exception, we will be exempt from the rules that:
                •    require that a majority of a board of directors consist of independent directors;
                •    require that executive officer compensation be overseen entirely by independent directors, or that the Compensation Committee be comprised
                     solely of independent directors; and
                •    require that director nominations be overseen entirely by independent directors, or that the Corporate Governance and Nominating Committee
                     be comprised solely of independent directors, with a board resolution or formal written charter, as applicable, addressing the nominations
                     process.

                As a result, we will not have a majority of independent directors, our Corporate Governance and Nominating Committee and our Compensation
         Committee will not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to shareholders of companies
         that are subject to all of the Nasdaq Stock Market corporate governance requirements.

               The “controlled company” exception does not modify the independence requirements for the audit committee, requiring that our audit committee be
         comprised exclusively of independent directors. Pursuant to SEC and Nasdaq Stock Market rules, we are required to have one independent audit
         committee member upon the listing of our common shares on the Nasdaq Stock Market, a majority of independent directors within 90 days of the date of
         such listing and all independent audit committee members within one year of the date of such listing.

                In addition, at such time as the “group” described above owns less than a majority of our outstanding voting securities, we will no longer be entitled
         to the “controlled company” exception. However, based on current Nasdaq Stock Market rules, we generally would not be required to fully comply with
         the director and committee independence requirements described above until one year after we cease to be entitled to the “controlled company” exception.

               Our board of directors has undertaken a review of the independence of each director and considered whether any director has a material relationship
         with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. As a result of this review, our
         board of directors determined          ,        and         , representing       of our          directors, are “independent directors” as defined under
         the applicable rules and regulations of the SEC and the Nasdaq Stock Market.

         Committees of the Board of Directors
              Our board of directors has three principal committees: an Audit Committee, a Compensation, Governance and Nominating Committee and a Legal
         and Regulatory Committee.

         Audit Committee
               The Audit Committee will be comprised of             ,         and          .        will be the chairman of the committee. The Audit Committee is
         responsible for assisting our board of directors with its oversight responsibilities regarding the following:
                •    monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements;
                •    appointing, compensating, retaining and reviewing the qualifications, independence and performance of the independent registered public
                     accounting firm;

                                                                                      170




178 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                •    reviewing the adequacy and effectiveness of our internal control policies and procedures;
                •    discussing with our general counsel our compliance with regulatory requirements and any legal matters having an impact on financial
                     statements; and
                •    reviewing the policy with respect to related party transactions and approving or rejecting proposed related party transactions.

                The members of our audit committee will meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the
         Nasdaq Stock Market. Moreover, our board has determined that               is an audit committee financial expert as defined under the applicable rules of the
         SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of the Nasdaq Stock Market. Each of            ,
                 and         will be an independent director as defined under the applicable rules and regulations of the SEC and the Nasdaq Stock Market. The
         audit committee operates under a written charter that satisfies the applicable standards of the SEC and the Nasdaq Stock Market. You can view our Audit
         Committee Charter on the corporate governance section of our website.

         Compensation, Governance and Nomination Committee
               Our Compensation, Governance and Nomination Committee will consist of                ,        and        . will be the chairman of the committee. The
         Compensation, Governance and Nomination Committee will be responsible for, among other things, determining our executives’ base compensation and
         incentive compensation, including designing (in consultation with management or the board) and recommending to the board for approval and evaluating,
         our compensation plans, policies and programs, administering our stock option and other equity-based plans and approving the terms of equity-based grants
         pursuant to those plans, identifying qualified candidates to become directors, recommending to the board candidates for all directorships, overseeing the
         annual evaluation of the board and its committees and taking a leadership role in shaping the corporate governance of the company. The Compensation,
         Governance and Nomination Committee has the full authority to determine and approve the compensation of our chief executive officer in light of relevant
         corporate performance goals and objectives. We rely on the “controlled company” exemption from the requirement of having a fully independent
         Compensation Committee and fully independent Nominating and Corporate Governance Committee. The Compensation, Governance and Nomination
         Committee operates under a written charter that satisfies the applicable standards of the SEC and the Nasdaq Stock Market.

         Legal and Regulatory Committee
               Our Legal and Regulatory Committee will consist of          ,         and         .         will be the chairman of the committee. The Legal and
         Regulatory Committee will be responsible for, among other things, monitoring significant developments in the laws and regulations applicable to us and
         determining a framework for interactions with applicable authorities, reviewing our significant legal risks and management of such risks, developing a
         Code of Ethics and Conduct and regularly reviewing such code, overseeing senior management in their efforts to implement and maintain good business
         practices, and reviewing our scheme of delegation and signatory regime.

         Corporate Governance and Code of Ethics
               The board of directors has adopted corporate governance guidelines that, along with the charters of the principal committees of the board of
         directors and our Code of Business Conduct and Ethics, which we refer to as our Code of Conduct, provide the framework for the governance of the
         Company. A complete copy of our governance guidelines, the charters of our principal committees of the board of directors, and our Code of Conduct may
         be found on our investor relations website at            . The board of directors regularly reviews corporate governance developments and modifies
         these policies as warranted. Any changes in these governance documents will be reflected in the same location on our website.

                                                                                      171




179 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         Director Compensation
               We did not pay cash fees to any of our directors in 2009 for their service as directors. Beginning in 2010, our Chairman and other directors who are
         not employees of the Company or our pre-offering shareholders will be paid an annual cash fee, in accordance with director agreements we have entered
         into with them, equal to $       ,$         and $        , respectively. We do not expect to pay our directors who are also our employees or employees of
         our pre-offering shareholders (other than our Chairman) any compensation for their service as directors. All directors will be reimbursed for reasonable
         out-of-pocket expenses incurred by them in connection with attending board of directors, committee and shareholder meetings, including those for travel,
         meals and lodging. We reserve the right to change the manner and amount of compensation to our non-employee directors at any time.

                Our Compensation Committee, in December 2009, granted Mr. Flint, our Chairman, a stock option under the Skype Equity Incentive Plan to purchase
         ordinary shares of the Company. One-half of the shares subject to the option vests based on the passage of time and the remaining one-half vests based on
         the achievement of investor return thresholds. The terms and conditions of the stock option grant are similar to the terms and conditions of the stock options
         granted to employees generally. For a discussion of the Skype Equity Incentive Plan and the terms and conditions of stock options granted thereunder, see
         “Executive Compensation—Compensation Discussion & Analysis—Components of Executive Compensation—Long-Term Equity Incentives.” The grant
         date fair value of the stock option granted to Mr. Flint computed in accordance with applicable accounting standards is disclosed in the Director Summary
         Compensation Table below.

                In 2010, Mr. Flint was offered the opportunity to acquire beneficial ownership of shares of Skype Global by paying a portion of the purchase price
         using the proceeds of a full recourse loan from Skype Technologies S.A. Mr. Flint repaid the loan on August 9, 2010. On August 9, 2010, upon, and in
         consideration of, the redemption of the loan extended to Mr. Flint in early 2010, the Compensation Committee granted Mr. Flint a fully-vested stock option
         under the Skype Equity Incentive Plan to purchase 930 ordinary shares with an exercise price of $259.17. Please see “Certain Relationships and Related
         Party Transactions—Management Loans and Related Option Issuances” for additional discussion of the loan and stock option grant. The equity ownership
         of our directors is set forth in the beneficial ownership table in “Principal and Selling Shareholders.”

                                                                                      172




180 of 341                                                                                                                                                   8/9/2010 8:37 AM
Registration Statement on Form S-1                                                       http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                                                         DIRECTOR SUMMARY COMPENSATION TABLE

                The following table summarizes the total compensation paid by the company to our directors for the fiscal year ended December 31, 2009.

                                                                                      Fees Earned or                                    All Other
                                                                                       Paid in Cash           Option Awards           Compensation           Total
         Name                                                                               ($)                    ($)                      ($)               ($)
         Miles Flint
         James A. Davidson
         Egon Durban
         Charles Giancarlo
         Simon Patterson
         John Donahoe
         Robert H. Swan
         Nicholas Staheyeff
         Marc Andreessen
         Ben Horowitz
         Alain Carrier
         Erik Levy
         Norbert Becker
         Jean-Louis Schiltz
         M.F.A. Mulder Beheer B.V.
         Joltid Limited

                                                                                   173




181 of 341                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                                                                    EXECUTIVE COMPENSATION

         Compensation Discussion & Analysis
         Overview
                The compensation provided to our “named executive officers” for 2009 is set forth in detail in the Summary Compensation Table and other tables
         and the accompanying footnotes and narrative material that follow this section. This section explains our executive compensation philosophy and
         objectives, our compensation determination process, the key components of our compensation program and the decisions made in 2009 for each of our
         named executive officers, including compensation decisions related to the Skype Acquisition, as well as our anticipated compensation program following
         this offering.

                Our named executive officers for 2009, which consist of those executive officers who appear in the Summary Compensation Table, were (1) Joshua
         Silverman, our current Chief Executive Officer, (2) Laura Shesgreen, our former Chief Financial Officer who currently serves as our Vice President of
         Finance and (3) Scott Durchslag, our former Chief Operating Officer whose employment with us ceased effective January 15, 2010. Effective March 31,
         2010, Adrian Dillon became our Chief Financial Officer, effective June 1, 2010, Neal Goldman became our Chief Legal and Regulatory Officer and
         effective January 7, 2010, David Gurlé became our Vice President and General Manager for Skype for Business. In connection with this offering, Messrs.
         Dillon, Goldman, Gurlé and Stevens (who has served as Vice President and General Manager for Consumer since April 20, 2009) will be designated as
         executive officers for securities law reporting purposes. However, in accordance with SEC regulations, executive officers hired after the end of the most
         recent fiscal year for which compensation information is being presented are not named executive officers.

               Prior to the Skype Acquisition, Skype Global had no separate operating history and the Skype Companies were initially wholly-owned by eBay
         following the eBay Acquisition in 2005. As subsidiaries of eBay during this period, the Skype Companies historically shared the executive compensation
         philosophy and objectives of eBay, and our employees, including our named executive officers, were compensated by eBay (or one of its direct or indirect
         majority-owned subsidiaries (then including the Skype Companies)), which was primarily responsible for determining all aspects of the compensation of
         our employees, including our historical compensation strategy.

                Following the Skype Acquisition, the Skype Companies became direct, wholly-owned subsidiaries of Skype Global. Our Compensation Committee
         is responsible for overseeing the compensation of our employees, including our named executive officers, for establishing our compensation philosophy
         and programs and for determining the appropriate payments and awards to our named executive officers. Because our current compensation program is in
         large measure based on the program in effect while we were a wholly-owned subsidiary of eBay, the compensation program described below for periods
         prior to the Skype Acquisition is not necessarily indicative of how we will compensate our named executive officers in the future. We expect that we will
         continue to review, evaluate and modify our compensation framework as a result of our becoming a stand-alone company, and after this offering, a
         publicly-traded company. The compensation program following this offering could vary significantly from our historical practices.

         Executive Compensation Philosophy and Objectives
               As discussed above in “Business Description—Competition,” our business operates in a highly complex and intensely competitive business
         environment, which is being constantly reshaped by sweeping technological advances, rapidly changing market requirements and the emergence of new
         competitors. In order for us to succeed in this environment, it is critical that we have a highly talented, seasoned and dedicated team of technical and
         business professionals with the skills to develop new products and features and capitalize on new business opportunities. To meet this challenge, we have
         designed a compensation philosophy such that our executive compensation program makes us competitive within the Internet and high-technology
         industries, where there is significant competition for proven, talented leaders who possess the skills and experience to build and deliver on

                                                                                    174




182 of 341                                                                                                                                               8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         long-term value creation and to help us achieve our strategic objectives. We also believe compensation should be determined within a framework that is
         intended to reward individual contribution and the achievement of Company objectives.

               Within the framework of this overall philosophy, since the Skype Acquisition, we have designed our executive compensation program to achieve the
         following primary executive compensation objectives:
                •    recruit, retain and incentivize highly talented and dedicated executives, with the right skills and experience to manage and operate our business
                     and deliver on long-term value creation;
                •    provide our executive officers with compensation opportunities that are fair, reasonable and competitive with the compensation opportunities
                     available to executives in comparable positions at companies with whom we compete for executive talent;
                •    make compensation sensitive to both Company and individual performance;
                •    promote transparency through the use of relatively few, straightforward compensation components; and
                •    align the interests of our executive officers with the interests of our stockholders, both in the short-term and the long-term.

               Following this offering, we expect these objectives to continue to be our primary executive compensation objectives as we transition to being a
         publicly-traded company.

                As described in greater detail below under “—Components of Executive Compensation,” to achieve our executive compensation objectives, we
         compensate our executives through a mix of base salary, short-term cash incentives, long-term incentives in the form of stock option awards and other
         benefits that is designed to be competitive with companies with whom we compete for executive talent and to be fair and equitable to us, our executives
         and our equity holders. We believe this combination of cash and equity is largely consistent with the forms of compensation provided by other companies
         with which we compete for executive talent, and, as such, is a package that matches the expectations of our executives and of the market for executive
         talent, helps reward them for performance in the short-term and induces them to contribute to the creation of value in the Company over the long-term.

         Compensation Determination Process
               Prior to the Skype Acquisition, the Compensation Committee of the Board of Directors of eBay, or the eBay Compensation Committee, was
         responsible for setting and overseeing the overall compensation strategy for eBay employees globally, and the compensation programs for the Skype
         Companies operated within eBay’s global compensation framework. All decisions with respect to the compensation of our named executive officers were
         largely dictated by eBay and our named executive officers, as well as all of our other employees, were generally treated the same as similarly situated
         employees at eBay and other subsidiaries of eBay. Within eBay’s global executive compensation framework, our Chief Executive Officer’s compensation
         (including equity grants) was determined by the eBay Compensation Committee based on the recommendations of eBay’s Chief Executive Officer. The
         compensation levels for our other named executive officers were determined based on the salary, bonus and equity ranges and the compensation framework
         established by eBay for its employees globally with the result that employees at similar levels at eBay and other subsidiaries of eBay received comparable
         compensation. These global ranges and framework were determined, in part, by reference to compensation information on pay levels at eBay’s peer group
         of companies prepared by Towers Perrin (which changed its name to Towers Watson & Co. following the completion of its merger with Watson Wyatt on
         January 1, 2010), the eBay Compensation Committee’s independent compensation consultant, and proprietary third-party survey data provided by Towers
         Watson. Our Chief Executive Officer and human resources personnel had limited discretion to compensate our named executive officers (other than our
         Chief Executive Officer, whose compensation was determined by the eBay Compensation Committee), as well as all of our other employees, within the
         salary, bonus and equity ranges established by eBay.

                                                                                       175




183 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                Following the Skype Acquisition, we established a Compensation Committee consisting of a subset of the board of directors to assist our board in
         the discharge of its responsibilities relating to our executive compensation program. Our Compensation Committee is ultimately responsible for designing,
         implementing, reviewing and administering our executive compensation program and for determining the specific base salaries, short-term cash incentives
         and long-term equity incentives paid to each of our executive officers, including our named executive officers. Our Chief Executive Officer is not a member
         of the Compensation Committee. However, we expect that he will continue to provide input to our Compensation Committee regarding our executive
         compensation program. Our Compensation Committee will consider the Chief Executive Officer’s recommendations regarding base salary and cash and
         equity incentives when determining the appropriate levels of compensation for each of our executive officers (other than his own), but may adjust such
         recommendation up or down as it determines in its discretion. Our Chief Executive Officer attends from time to time, and our current Chief Financial
         Officer and the Global Director of Human Resources regularly attend, meetings of our Compensation Committee to participate in discussions regarding
         compensation matters, performance goals and the competitive landscape of our business.

               Our Compensation Committee is responsible for setting the performance goals for our Chief Executive Officer, and recommending to the board of
         directors his compensation, including base salary, cash incentive and long-term equity incentive amounts. In addition, our Compensation Committee
         undertakes an annual review of our Chief Executive Officer’s performance, for which our Chief Executive Officer provides a self-assessment of his
         performance to the Compensation Committee for their consideration. Our Chief Executive Officer is not present during any discussion regarding his
         performance or compensation. For a discussion of the Compensation Committee’s role and responsibility, see “Management—Committees of the Board of
         Directors—Compensation Committee” above. A copy of the Compensation Committee’s charter is available on the corporate governance section of our
         website.

               The Compensation Committee had a limited role in setting and approving compensation for 2009 as the majority of the decisions were made prior to
         the Skype Acquisition, during which time the compensation decisions for our named executive officers were made within the compensation framework
         established by eBay for its employees globally. Following the Skype Acquisition, the Compensation Committee was responsible for approving the
         adoption of the Skype Equity Incentive Plan and granting stock options to employees, including our named executive officers, following the Skype
         Acquisition. For a discussion of the Skype Equity Incentive Plan, see “—Components of Executive Compensation—Long-Term Equity Incentives” below.
         In 2010, the Compensation Committee was responsible for reviewing and approving new employment contracts for our Chief Executive Officer, our new
         Chief Financial Officer, our new Chief Legal and Regulatory Officer and our new Vice President and General Head Manager for Skype for Business,
         recommending officer appointments and approving the adoption of the cash incentive plan for 2010. For a discussion of the employment contracts for our
         Chief Executive Officer and our new Chief Financial Officer, see “—Employment Agreements” below and for a discussion of our cash incentive plan see
         “—Components of Executive Compensation—Short-Term Cash Incentives” below.

               In the future, we intend to further develop our benchmarking processes and framework for gathering and analyzing market data on compensation
         practices and trends among the competitors with whom we compete for executive talent. During the second half of 2009, in conjunction with our separation
         from eBay, Towers Watson conducted a broad-based benchmark exercise, as well as a number of targeted benchmarking requests, on our behalf with a
         blended selection of relevant companies, including competitor companies both within and outside the Internet and high-technology industries, but not using
         a specified peer group of companies. These reviews assisted us in determining our competitive compensation position and in starting to build our
         compensation foundations as a stand-alone company. We may create a defined peer group of key competitors in the future as part of our ongoing
         development of our benchmarking processes. In the meantime, we expect that members of our Compensation Committee will use their reasonable business
         judgment and, for our directors affiliated with venture capital or private equity firms who have representatives on the boards of numerous private and
         public companies or who serve on other boards of directors, their personal experiences to determine and approve

                                                                                    176




184 of 341                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         compensation amounts that would allow us to achieve our executive compensation objectives. We expect that consideration will be given to each
         executive’s overall responsibilities, professional qualifications, business experience, job performance, technical expertise and career potential, and the
         combined value of these factors to long-term value creation and achieving our strategic objectives.

                In 2009, we also conducted a comprehensive review of our compensation philosophy, compensation architecture and incentive arrangements with the
         assistance of Towers Watson. As a result of this review, we revised our short-term cash incentive program for 2010 to make the bonus more dependent on
         corporate rather than individual performance and expanded the financial objectives used to measure corporate performance. These changes are discussed
         further in “—Components of Executive Compensation—Short-Term Cash Incentives” below.

               The Compensation Committee may select, retain and terminate outside compensation consultants to provide data and advice to the Compensation
         Committee with respect to compensation matters, but at the present time, our Compensation Committee has yet to select an independent consultant. The
         Compensation Committee also has the authority to obtain advice and assistance from internal or external legal, accounting and other advisors. Although the
         Company pays for any compensation consultant or other advisor, the consultant or advisor reports directly to the Compensation Committee and the
         Compensation Committee, in its sole discretion, approves the fees to the compensation consultant or advisor and any other terms related to the consultant’s
         or other advisor’s engagement.

         Components of Executive Compensation
               The key components of our executive compensation program are:
                 •   base salary;
                 •   short-term cash incentives;
                 •   long-term equity incentives; and
                 •   other benefits and perquisites.

               We believe that the use of relatively few, straightforward, compensation components promotes the effectiveness and transparency of our executive
         compensation program and enables us to be competitive in the Internet and high-technology industries in which we operate. No formula or specific
         weightings or relationships are used with regard to the allocation of the various pay elements within the executive compensation program. So, for example,
         while we do not have a fixed policy for the allocation between cash and equity compensation or short-term and long-term compensation, these
         compensation components are designed to provide a mix of fixed and at-risk compensation that is tied to the achievement of our short- and long-term goals.
         Each component of compensation has an important role in implementing our executive compensation philosophy and in meeting the executive compensation
         objectives described above, as described in more detail below.

             We also provide our named executive officers with severance or similar benefits and change in control protection, as described below under
         “—Employment Agreements; Severance and Change in Control Provisions.”

             Base Salary
               We provide our named executive officers and other employees with a base salary to compensate them for services rendered on a day-to-day basis
         during the fiscal year. Base salaries provide stable compensation to executives, allow us to recruit and retain highly talented and dedicated executives and,
         through periodic merit increases, provide a basis upon which executives may be rewarded for individual performance. Each of our named executive
         officers has an employment agreement which sets his or her minimum base salary. For more information regarding the terms and conditions of our named
         executive officers’ employment, see the narrative following the Grants of Plan-Based Awards in 2009 table.

                                                                                      177




185 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                The base salary levels of continuing executives are reviewed annually by our Compensation Committee to determine whether an adjustment is
         warranted or necessary. The Compensation Committee takes into account numerous factors in making its determination, none of which are dispositive or
         individually weighted, including our financial performance, the state of our industry and local economies in which we operate, the executive officer’s
         relative importance and responsibilities, location, the executive officer’s track record in meeting his or her performance objectives and comparable
         salaries paid to other executives of similar experience in our industry.

               The base salaries paid to our named executive officers during 2009 are reported in “—Summary Compensation Table” below. As of December 31,
         2009, the annual base salary rates for our named executive officers were $            ,$         and $        for Mr. Silverman, Ms. Shesgreen and
         Mr. Durchslag, respectively. The base salaries were generally determined based on the salary and the compensation framework established by eBay for its
         employees globally. In connection with the Skype Acquisition, Mr. Silverman negotiated a new employment agreement, which was effective as of
         November 19, 2009, the completion date of the Skype Acquisition. Under his new employment agreement, Mr. Silverman’s annual base salary rate was
         increased from $         to its current rate as a result of arm’s length negotiation of his new agreement and to partially compensate him for the increased
         level of expected performance as Chief Executive Officer of a stand-alone company. Ms. Shesgreen’s annual base salary rate was increased in March,
         2009 from $         to $         , and further increased in March, 2010 to $          . The increase in 2009 reflects a 2.5% mandatory increase under
         Luxembourg law and an increase as a result of Ms. Shesgreen’s promotion to vice president effective March 1, 2009. The increase in 2010 reflects the
         2.5% mandatory increase under Luxembourg law. Mr. Durchslag was hired in 2008 and his base salary was not increased in 2009 because, at the time
         salary increases were considered, he had been employed by us for less than a year and his initial base salary was deemed to still be appropriate.

             Short-Term Cash Incentives
                As a key component of our compensation program, we provide our named executive officers with the opportunity to earn cash incentives based on
         the achievement of our short-term business objectives. As additional cash compensation that is contingent on achievement of our business objectives,
         short-term cash incentives augment the base salary component while being tied directly to corporate and individual performance objectives.

               Short-term cash incentives for 2009 were determined under the 2009 Skype Bonus Plan, a cash incentive program designed by eBay to align
         employee compensation with Skype’s corporate performance, allow us to recruit and retain competent executive talent and provide an incentive and
         reward for superior performance measured over the short-term. The plan provides for the payment of semi-annual bonuses based on the achievement of
         corporate and individual performance objectives. For 2009, 50% of the bonus was based on corporate performance measured against the financial
         objective of GAAP revenue at budgeted rates, which is generally viewed as a good measure of growth and the success of the business, and 50% of the
         bonus was based on individual performance relative to goals, job level and peers. For 2009, individual goals for our Chief Executive Officer consisted of
         several criteria, which were not individually weighted, including attainment of targeted performance measures, successful completion of the separation of
         the Skype Companies, successful management of our business and an overall performance assessment. Our Chief Financial Officer’s individual goals also
         consisted of several criteria, which were not individually weighted, including attainment of targeted performance measures, delivery of high quality
         financial and customer insight information to enable business decision making, successful completion of the separation of the Skype companies and
         successful support of key strategic business initiatives. The 2009 corporate performance measures were determined based on comprehensive discussions
         between our Chief Executive Officer, our Chief Financial Officer and eBay’s Chief Financial Officer, and were approved by the eBay Compensation
         Committee. Actual performance was measured at the end of each semi-annual period to determine the payout amount for both components. Corporate
         performance for 2009 was, for the first time, measured based solely on the Skype Companies’ and not eBay’s results and, accordingly, the measurement of
         corporate performance for the period July 1, 2009 through

                                                                                    178




186 of 341                                                                                                                                                8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         December 31, 2009 was not affected by the Skype Acquisition. For our named executive officers, the payout range for the corporate component ranged
         from 0% to 200% and the payout range for the individual component ranged from 0% to 125%, so that the bonus payable ranged from 0% to 162.5% of the
         target bonus.

                In 2009, no semi-annual bonuses would have been paid if the minimum threshold goal established for operating income was not met. Operating
         income, for these purposes, is a non-GAAP measure, calculated as management non-GAAP income from operations, prior to adjustment. The amount by
         which the bonus plan was funded for 2009 was determined based on the Company’s actual revenues measured against the established goals. The Company
         established “threshold,” “target” and “maximum” revenue goals and the amount funded would be 50% if the threshold revenue goal was achieved, 100% if
         the target revenue goal was achieved and 150% if the maximum revenue goal was achieved. When the Company achieves results that are above the target
         goal, an additional discretionary fund is generated for allocation to eligible employees, including our named executive officers. When the Company’s
         performance is below the target goal, but above the threshold goal, the Company applies a corporate component modifier which results in the individual
         component funding at the same percentage as the Company’s financial result. No payments are made where performance is below the threshold revenue
         goal even if the threshold goal established for operating profit was met. At the time they are set, the performance goals are, to a large extent, uncertain to be
         achieved. The threshold goals can be characterized as “stretch but attainable” goals, meaning that, based on historical performance, although attainment of
         this performance level is uncertain, it can reasonably be anticipated that the threshold goal may be achieved, while the target and maximum goals represent
         increasingly challenging and aggressive levels of performance.

               The table below summarizes the threshold, target and maximum goals established for the period January 1, 2009 through June 30, 2009 and the actual
         performance of the Company:

                                                                                                                                                    Actual Performance
                                                                                             First Half 2009 Performance Range (1)            January 1, 2009 – June 30, 2009
         Performance Metric                                            Weighting         Threshold           Target         Maximum          Actual           As a % of Target
         Operating Income                                                                                     N/A                N/A
         Revenue
         (1)   For performance between threshold and target revenue goals or target and maximum revenue goals, payout is determined linearly based on a straight
               line interpolation of the applicable payout range.

               The table below summarizes the threshold, target and maximum goals established for the period July 1, 2009 through December 31, 2009 and the
         actual performance of the Company:

                                                                                                                                                      Actual Performance
                                                                                                                                                         July 1, 2009 –
                                                                                              Second Half 2009 Performance Range (1)                  December 31, 2009
                                                                                                                                                                     As a % of
         Performance Metric                                         Weighting           Threshold            Target            Maximum            Actual               Target
         Operating income                                                                                      N/A                     N/A
         Revenue
         (1)   For performance between threshold and target revenue goals or target and maximum revenue goals, payout is determined linearly based on a straight
               line interpolation of the applicable payout range.

               For 2009, Messrs. Silverman and Durchslag and Ms. Shesgreen had target short-term incentive bonus opportunities equal to           %,      % and
              % of their base salaries, respectively. The target bonus opportunities of our named executive officers, other than our Chief Executive Officer, were
         generally determined based on the bonus ranges and the compensation framework established by eBay for its employees globally. Mr. Silverman’s target
         bonus opportunity was set under guidelines established by the eBay Compensation Committee at the time of his appointment to the position of Chief
         Executive Officer in March 2008 and was maintained for 2009.

                                                                                       179




187 of 341                                                                                                                                                         8/9/2010 8:37 AM
Registration Statement on Form S-1                                                        http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                For the period January 1, 2009 through June 30, 2009, the payout level was determined by reference to the achievement of the performance goals.
         For the period July 1, 2009 through December 31, 2009, we met the operating profit threshold and, based on our revenue performance shown in the table
         above, bonus funding was 83% at target. Recognizing the extraordinary efforts and accomplishments of our employees in conjunction with the Skype
         Acquisition and the resulting changes to our organization, our Compensation Committee determined that it was in the best interests of the Company to fully
         fund the individual performance component, which accounts for 50% of the total bonus payment. As a result, the estimated bonus funding at target was
         increased from 83% to 91%, 41% for the corporate performance component and 50% for the individual performance component. For our Chief Executive
         Officer, in recognition of his extraordinary leadership in connection with the Skype Acquisition, the Compensation Committee approved a bonus equal to
         100% of his target bonus, 50% for both the corporate performance component and the individual performance component.

               Based on the performance of each measure listed in the tables above and individual performance, the table below displays the bonus payout for each
         individual (as a percentage of base salary and dollar amount) for 2009.

                                                                                                2009 Annual Incentive Opportunity
                                                                                                      as a % of Base Salary                    2009 Annual Payout(1)
                                                                                                                                                        As a % of Base
                                                                                          Threshold        Target             Maximum       In $            Salary
         Joshua Silverman, Chief Executive Officer                                              %              %(2)                 %       $                      %
         Laura Shesgreen, Vice President—Finance(3)                                             %              %                    %       $                      %
         Scott Durchslag, Former Chief Operating Officer                                        %              %                    %       $                      %
         (1)   The amounts shown in this table reflect our Compensation Committee’s adjustment of the semi-annual bonus payments for the period July 1, 2009
               through December 31, 2009 described above.
         (2)   Under the new employment agreement that Mr. Silverman negotiated in connection with the Skype Acquisition, his annual target bonus was increased
               to     % for 2010.
         (3)   Ms. Shesgreen served as our Chief Financial Officer until March 31, 2010. Thereafter, she continued her employment as our Vice President of
               Finance.

                In 2010, the Compensation Committee adopted the 2010 Skype Bonus Plan, which modified our 2009 bonus program in a number of respects.
         Short-term incentives continue to be based on the achievement of corporate and individual performance objectives, although the weighting was changed so
         that 75% of the bonus is based on corporate performance and 25% of the bonus is based on individual performance. The bonus payable can range from 0%
         to 162.5% of the target bonus for both components. For 2010, the corporate performance measures were also revised and, instead of being based solely on
         revenue as in 2009, are based on three key metrics: revenue (30%); Adjusted EBITDA for the incentive plan (“Incentive Compensation Adjusted
         EBITDA”) (30%); and connected users (15%). Incentive Compensation Adjusted EBITDA, for these purposes, is a different metric than the Adjusted
         EBITDA described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Adjusted EBITDA,” primarily
         resulting from additional exclusions determined by management, including allocations for certain corporate and administrative services and support
         provided to the Company by eBay, certain relocation and severence payments to employees. The individual component of the bonus is determined by the
         individual to whom the named executive officer reports (or for our Chief Executive Officer, the Compensation Committee), taking into account achievement
         against company-aligned personal objectives rather than a fixed, prescribed performance rating, which are reviewed and approved by the Compensation
         Committee. In addition, no bonus will be paid if a minimum Incentive Compensation EBITDA threshold level established for the performance period is not
         met, instead of a minimum operating profit threshold as in 2009. The 2010 performance measures were determined based on comprehensive discussions
         between our Chief Executive Officer, Chief Financial Officer and input and guidance from Towers Watson and were approved by our Compensation
         Committee. We believe these performance measures are appropriate for our executives as they capture short- and intermediate-term results, including our
         continued growth trajectory, and provide a balanced measure of our performance. For our Chief Executive Officer and other employees with a title of vice
         president or above, performance against the revenue and Incentive Compensation Adjusted EBITDA goals is based on

                                                                                    180




188 of 341                                                                                                                                                 8/9/2010 8:37 AM
Registration Statement on Form S-1                                                          http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         actual results, without restating for the effects of foreign exchange. For all other employees, performance against the revenue and Incentive Compensation
         Adjusted EBITDA goals is based on actual results restated to our budget constant currency rates.

               For 2010, short-term incentive awards will continue to be paid on a semi-annual basis for all executives other than our Chief Executive Officer and
         Chief Financial Officer, who will be paid on an annual basis. Actual performance for our Chief Executive Officer and Chief Financial Officer will be
         measured at the end of the year to determine the payout amount for all three components. Our Compensation Committee believes that an annual performance
         period for our Chief Executive Officer and Chief Financial Officer is more appropriate for our business, reflects market practice for these roles and allows
         our Compensation Committee to have a more detailed and balanced perspective into their individual performance.

                Short-term cash incentives, if any, are generally paid within two months following the close of the performance period. To be eligible to receive
         payment of any semi-annual cash incentive, an executive must be employed for the full calendar quarter preceding the payout and, subject to local law
         restrictions, must be employed on the date of payment.

               The “—Grants of Plan-Based Awards in 2009” table below shows the threshold, target and maximum aggregate annual cash incentives that each of
         our named executive officers was able to receive in 2009. The aggregate annual cash incentives actually earned by our named executive officers in 2009
         are shown in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

             Long-Term Equity Incentives
               We believe that long-term incentives are a critical component of our executive compensation program and our equity incentive plan is the primary
         vehicle for offering long-term incentives to our executives. While we do not have formal stock ownership guidelines for executive officers at this time, we
         believe that equity grants provide our executives, including our named executive officers, with a strong link to our long-term performance, create an
         ownership culture and help to align the interests of our executives and our stockholders. Because employees profit from stock options only if the value of
         our shares increases relative to the stock option’s exercise price, we believe that stock options provide a meaningful incentive to employees to build
         shareholder value by achieving increases in the value of our shares over time. In addition, the vesting features of our equity grants, described in more detail
         below, contribute to executive retention by providing an incentive to our executives to remain in our employ during the vesting period and also provide a
         meaningful incentive to employees to build shareholder value since a portion of the grants to named executive officers and other employees vest based on
         our initial equity investors’ (the “Initial Equity Investors”) return on their initial investment in connection with the Skype Acquisition. Although stock
         options are now expensed for financial accounting purposes like other equity-based awards, given the compensation practices used in our industry and the
         location of our employees, we currently use stock options as the sole means of providing long-term equity incentives to our employees.

                Following the Skype Acquisition, we adopted the Skype Equity Incentive Plan, under which employees, directors, service providers and consultants
         are eligible to receive equity based compensation awards in the form of options to purchase ordinary shares of the Company. Stock options are granted
         with an exercise price that is at least equal to the fair market value of our ordinary shares on the grant date, as determined by our Compensation Committee
         after taking into account a variety of factors, including the most recent valuation report prepared by an independent third-party appraiser selected by the
         Company, vest based on the passage of time and/or the achievement of investor return thresholds and expire after ten years. A maximum of
         ordinary shares of the Company are available to be subject to stock options granted under the Skype Equity Incentive Plan. As of the date of this
         prospectus, stock options to purchase             ordinary shares of the Company are outstanding and            ordinary shares of the Company remain
         available for grant. The Compensation Committee has the authority to determine the terms of any specific stock option grant, including the vesting
         provisions, which may vary from the default provisions set forth in the Skype Equity Incentive Plan, which are described below.

                                                                                      181




189 of 341                                                                                                                                                    8/9/2010 8:37 AM
Registration Statement on Form S-1                                                            http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

                Stock options that vest based on the passage of time, referred to as time-based stock options, generally vest over five years and become exercisable
         as to 20% of the shares on the first anniversary of the grant date (or such other date determined by the Compensation Committee) and the remainder vesting
         and becoming exercisable in equal monthly installments of 1.667%. If a change in control occurs, the time-based stock options will continue to vest based
         on the standard schedule, but in no event will less than two-thirds of the shares subject to the stock option vest by the first anniversary of the change in
         control, and all such shares will be fully vested by the second anniversary of the change in control. In addition, the vesting of time-based stock options will
         be accelerated if, during the two-year period following a change in control, the option holder’s service terminates on account of an involuntary termination
         (including, for our named executive officers, a constructive termination) or on account of death or disability. The completion of this offering will not
         impact the vesting of time-based stock options, but will impact the vesting criteria applicable to the vesting of the performance-based stock options, as
         discussed below.

                Stock options that vest based on the achievement of investor return thresholds, referred to as performance-based stock options, generally vest and
         become exercisable based on the “multiple of money” return achieved upon the occurrence of an event that results, directly or indirectly, in the sale,
         transfer or other disposition of ordinary shares held by the Initial Equity Investors for cash. (For this purpose, eBay International AG is not treated as an
         Initial Equity Investor.) If a liquidity event occurs, the percentage of performance-based stock options that vests is calculated as the product of the
         percentage of shares sold by the Initial Equity Investors and a pre-determined percentage of the number of shares subject to the performance-based stock
         option based on the multiple of money return achieved by the Initial Equity Investors. The pre-determined percentage of the tranche of options eligible to
         vest in connection with this offering is based on the following schedule:

                                                                                                              Cumulative Percentage of
                                                     Fully Diluted                                             Individual Performance
                                               Multiple of Money Return                                            Award Vested
                                                   Less than 1.0x                                                      0%
                                                        1.0x                                                        22.7273%
                                                        1.5x                                                        45.4545%
                                                        2.0x                                                        68.1818%
                                                        2.5x                                                        90.9091%
                                                   3.0x or greater                                                    100%

               In the event that the entire tranche of options eligible to vest does not vest at the time of the liquidity event as a result of the return achieved, the
         remaining options in such tranche will be forfeited. For example, if an employee holds a stock option to purchase 2,500 shares and the Initial Equity
         Investors sell 25% of their relevant shares and achieve a 2.0x return (i.e., 2 times $255.52, or $511.04), 625 of the 2,500 would be eligible to vest (i.e.,
         25% of 2,500 shares) and 426.14 shares would vest (i.e., 68.1818% of 625 shares) and 198.86 shares would be forfeited (i.e., 31.82% of 625 shares).

                The performance-based stock options that are not vested at the time of an initial public offering or certain other corporate transactions will become
         eligible to vest on subsequent anniversaries of the completion date of the original transaction that follows the end of the Initial Equity Investors’ lock-up
         period (but in no event later than six months following the end of the lock-up period) relating to an initial public offering or corporate transaction. At each
         eligible vesting date following an initial public offering or certain other corporate transactions, 20% of the shares subject to the original
         performance-based stock option will become eligible to vest on each such anniversary (with a catch-up for tranches that would have vested had the
         performance-based stock option vested 20% annually from the completion date of the Skype Acquisition). The total percentage of performance-based stock
         options that actually vest will be based on the Initial Equity Investors’ multiple of money return calculated using the 90 day average trading stock price
         prior to such anniversary. In addition, a portion of the performance-based stock options may vest if the option holder’s service is involuntarily terminated
         (including, for our named executive officers, a constructive termination), with the Initial Equity Investors’ multiple of money return calculated based on the
         fair market value of the ordinary shares at such time. For more

                                                                                        182




190 of 341                                                                                                                                                       8/9/2010 8:37 AM
Registration Statement on Form S-1                                                         http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         information regarding the compensation based expense related to performance-based stock options vesting on account of this offering, see “Management’s
         Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Results of Operations—General and Administrative.”
         For a description of the impact of the corporate reorganization on stock options issued under the Skype Equity Incentive Plan, see “Corporate
         Reorganization.”

                Generally, as a condition of the grant of any stock option under the Skype Equity Incentive Plan, optionholders agree that during their period of
         service for the Company and for six months following termination, whether voluntary or involuntary, the optionholder will not (i) compete with the
         Company or its affiliates, (ii) hire or attempt to hire any person who is or was, during the six months prior to the optionholder’s termination, an employee
         of the Company or (iii) solicit any business partner, vendor or client of the Company, provided such client’s revenues exceed $500,000 annually. The stock
         option agreements evidencing the grants to Messrs. Silverman and Dillon provide that the non-compete and non-solicit provisions in their employment
         agreement, as described below under “—Employment Agreements; Severance and Change in Control Provisions,” will apply instead of the provisions in
         the Skype Equity Incentive Plan.

               Our Compensation Committee granted stock options to employees, including our named executive officers, in December 2009 (although the grant to
         our Chief Executive Officer was made at a later date, as described below), and generally intends only to make additional grants of stock options in
         connection with new hires or promotions of employees, for retention purposes or for other circumstances recommended by management. For stock option
         grants made in 2009, our Chief Executive Officer delivered recommendations to the Compensation Committee shortly after the completion of the Skype
         Acquisition. The nominees and grant size reflected a number of key factors and criteria, none of which were dispositive or individually weighted,
         including the seniority of the individual, their role and contribution to the growth and success of our business, their past performance and future potential
         and the importance of retaining key skills within the organization going forward. In addition, we reviewed the historic eBay equity grants received by our
         employees prior to the Skype Acquisition and the value of unvested eBay equity awards held by employees of the Skype Companies forfeited as a result of
         the Skype Acquisition. We also took into account the nature of our equity program design and limited liquidity of the stock options granted.

               Mr. Silverman and Ms. Shesgreen were granted stock options to purchase               and          ordinary shares, respectively, of which 40% are
         time-based stock options and 60% are performance-based stock options, with an exercise price of $255.52 per share, which was determined by our
         Compensation Committee based on the price per share paid by the Initial Equity Investors in conjunction with the Skype Acquisition, prior to the issuance
         of shares in conjunction with the Joltid Transaction, and including transaction costs that we paid in connection with the Skype Acquisition. Ms. Shesgreen’s
         stock option grant was made on December 17, 2009 while Mr. Silverman’s grant was not made until the execution of his new employment agreement on
         February 22, 2010. However, the vesting commencement date for each of the stock options granted to Mr. Silverman and Ms. Shesgreen is November 19,
         2009, the completion date of the Skype Acquisition. The difference in the number of shares subject to the stock options granted to Mr. Silverman and
         Ms. Shesgreen reflects the factors and criteria set forth above and, in particular, our Compensation Committee’s expectations of Mr. Silverman following
         the Skype Acquisition. For more information regarding the stock options the Compensation Committee granted in 2009, see “—Summary Compensation
         Table—Grants of Plan-Based Awards in 2009” below. In connection with his hiring in 2010, the Compensation Committee granted Mr. Dillon a stock
         option to purchase         ordinary shares, of which 40% are time-based stock options and 60% are performance-based stock options, with an exercise
         price equal to $255.52 per share.

               Following the completion of this offering, our employees, including our named executive officers, may be eligible to receive equity-based awards
         pursuant to a new equity incentive plan, which the board of directors is considering adopting prior to the completion of this offering, subject to the
         approval of our shareholders.

               In early 2010, certain members of our senior management were offered the opportunity to acquire beneficial ownership of shares of Skype Global by
         paying a portion of the purchase price using the proceeds of a full

                                                                                     183




191 of 341                                                                                                                                                  8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         recourse loan from Skype Technologies. These loans were repaid on or about August 6, 2010. On August 3, 2010, contingent upon, and in consideration of,
         the redemption of the loan extended to these executives and the shares forfeited in conjunction therewith, the Compensation Committee granted these
         executives fully-vested stock options under the Skype Equity Incentive Plan to purchase              ordinary shares in the aggregate at an exercise price of
         $259.17. Please see “Certain Relationships and Related Party Transactions—Management Loans and Related Option Issuances” for additional discussion
         of these loans and stock option grants. The equity ownership of our named executive officers is set forth in the beneficial ownership table in “Principal and
         Selling Shareholders.”

             Other Benefits and Perquisites
               We also maintain employee benefit programs for our named executive officers and other employees. Our named executive officers generally
         participate in our employee health and welfare benefits, including medical, dental and vision coverage and life and long-term disability insurance, as
         applicable, on the same basis as all of the other employees in their local jurisdiction, subject to satisfying any eligibility requirements and applicable local
         law. We do not currently provide employees outside of the United States with any retirement benefits. Our named executive officers that are benefit-
         eligible in the United States are eligible to participate, on the same basis as all our benefit-eligible U.S.-based employees, in a tax-qualified retirement
         savings plan that we sponsor in the United States that provides a cost-effective retirement benefit for all benefit-eligible U.S.-based employees. Our 401(k)
         plan allows an eligible employee to defer up to 50% of his or her eligible compensation (up to the limits set by the Internal Revenue Service). The
         Company makes fully-vested matching contributions to the 401(k) plan equal to 100% of an employee’s contributions, up to 4% of the employee’s eligible
         compensation. We do not currently provide employees, including our named executive officers, with the opportunity to defer any compensation in excess of
         the amounts that are legally permitted to be deferred under the Company’s 401(k) plan.

                The Company’s global business needs require it on occasion to temporarily relocate certain employees with special or unique skills to countries
         where those skills may not be available. To meet this need, we maintain a general expatriate policy under which employees sent on expatriate assignments
         receive payments to cover certain expenses, including housing, relocation, living and travel expenses, tax preparation services and travel to and from the
         home country. In certain cases, we make tax equalization payments or reimbursements for expatriates to ensure that their assignment is tax neutral to the
         employee. These benefits are provided in recognition of the high cost of living in the United Kingdom and Luxembourg, where our employees have
         historically been assigned. In addition, Messrs. Silverman and Dillon are, and Mr. Durchslag was, provided additional benefits, including participation in
         an assignee health care program through Cigna International, in connection with their assignment. The total estimated cost of the expatriate benefits
         provided to our named executive officers in 2009 is described in further detail below under “—Summary Compensation Table.”

               We do not have a formal perquisite policy, but provide perquisites for our employees in locales where there is a local legal requirement or a
         recognized market practice among our competitors to provide such perquisites. We do not emphasize special perquisites for our named executive officers,
         although the Compensation Committee may periodically review perquisites for our executive officers, particularly in the context of new employment
         agreements. We currently provide extremely limited special perquisites that constitute a small component of total compensation for each named executive
         officer and we believe that the perquisites currently offered are reasonable in comparison to those typically provided by peer companies. The perquisites
         provided to our named executive officers in 2009 are described in further detail below under “—Summary Compensation Table.”

                                                                                       184




192 of 341                                                                                                                                                     8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

               For more information regarding other benefits and perquisites, see “—Summary Compensation Table” and the accompanying footnotes below.

         Skype Acquisition-Related Payments and Benefits
               Prior to the Skype Acquisition, our executive officers and other employees received grants of stock options and restricted stock units under equity
         incentive plans maintained by eBay. The Skype Acquisition was treated as a termination of employment for purposes of the eBay equity incentive plans,
         which generally resulted in the forfeiture of unvested eBay equity awards held by employees of the Skype Companies. The eBay Compensation Committee
         determined that equity awards held by our named executive officers that would have vested during the 12 month period following the Skype Acquisition
         would be vested as of the date of the Skype Acquisition. Vested eBay stock options remained exercisable for a period of three months from the date of the
         Skype Acquisition (or, if shorter, for a period ending on the stated expiration date of the stock option) and, if not exercised within that period, were
         cancelled. For more information regarding the value realized as a result of the exercise of eBay stock options or upon the vesting of eBay equity awards in
         2009, see “—Summary Compensation Table—Options Exercised and Stock Vested in 2009” below. Mr. Silverman also exercised additional vested eBay
         stock options in 2010, prior to their expiration date.

               In connection with the Skype Acquisition, the eBay Compensation Committee also determined that certain of our executives, including our named
         executive officers, would receive a special, one-time bonus to reward them for their support and dedication throughout the sale process. The amount of the
         transaction bonuses paid to our named executive officers was $        ,$         and $         for Mr. Silverman, Ms. Shesgreen and Mr. Durchslag,
         respectively, which represents 12 months’ cash compensation (base salary, target bonus and certain benefits). Payments were made shortly following the
         completion of the Skype Acquisition and were conditioned upon the executive’s execution of a general release of claims. These bonuses are shown in the
         “Bonus” column of the Summary Compensation Table below.

                eBay also implemented a retention bonus plan to reward the past service of certain employees of the Skype Companies, to secure their continued
         service and to ensure their continued dedication and objectivity through and after the Skype Acquisition without being concerned as to whether such
         employees might be hindered or distracted by personal uncertainties or risks created by the Skype Acquisition. Under the retention bonus plan, participants
         are eligible to receive a fixed retention payment within 30 days following the first anniversary of the completion of the Skype Acquisition, subject to their
         continued service through such date. If, prior to the payment date, we terminate a participant’s employment without “cause” (as defined in a participant’s
         employment or similar agreement or, if none exists, in the retention bonus plan), the retention payment will be paid within 30 days after the date of
         termination. If a participant’s employment with the Skype Companies terminates for any other reason (including as a result of death or disability) prior to
         the payment date, or if a participant gives notice prior to the payment date of his or her intent to terminate employment, the participant will forfeit any right
         to the retention payment. The retention bonuses payable to our named executive officers are $             ,$        and $        for Mr. Silverman,
         Ms. Shesgreen and Mr. Durchslag, respectively. Mr. Durchslag’s retention bonus was paid in connection with his termination of employment, which was
         effective January 15, 2010.

         Employment Agreements; Severance and Change in Control Provisions
               We have employment agreements with each of our named executive officers setting forth the terms and conditions of their employment with us, which
         we believe provide a total compensation package competitive with the package offered by companies with whom we compete for executive talent. For
         more information regarding the terms and conditions of our named executive officers’ employment, see the narrative following the Grants of Plan-Based
         Awards in the 2009 table.

               The employment agreements provide for severance and other benefits or require that we provide the executive with advanced notice of termination,
         as applicable, which are designed to provide economic protection

                                                                                       185




193 of 341                                                                                                                                                      8/9/2010 8:37 AM
Registration Statement on Form S-1                                                           http://edgar.sec.gov/Archives/edgar/data/1498209/000119312510182561...




         Table of Contents

         so that an executive can remain focused on our business without undue personal concern in the event that his or her position is eliminated or, in some cases,
         significantly altered by the company, which is particularly important in light of the executives’ leadership roles at the Company. The Compensation
         Committee believes that providing severance or similar benefits is common among similarly situated companies and remains essential to recruiting and
         retaining key executives, which is a fundamental objective of our executive compensation program. For more information regarding the potential payments
         and benefits that would be provided to our named executive officer in connection with a termination of employment or a change in control on December 31,
         2009, see “—Summary Compensation Table—Potential Payments upon Termination or Change in Control” below.

             Employment Agreements with Messrs. Silverman and Dillon
               On February 22, 2010, Mr. Silverman entered into a new employment agreement with Skype Inc., effective as of November 19, 2009, the date of the
         Skype Acquisition. Mr. Silverman’s agreement provides for his continued employment as Chief Executive Officer of Skype Global’s entire group of
         businesses and his continued service as a member of the board of directors of Skype Global, or following this offering, his nomination for election to our
         board of directors. On March 3, 2010, Mr. Dillon entered into an employment agreement with Skype Inc., effective as of the same date, providing for his
         employment as Chief Financial Officer of Skype Global’s entire group of businesses. Messrs. Silverman and Dillon have been seconded to Skype
         Communications S.à r.l for an indefinite period.

                Each of the employment agreements has an initial term of three years, which commenced on November 19, 2009 for Mr. Silverman and March 31,
         2010 for Mr. Dillon, and renew automatically for successive one-year periods thereafter, unless either party provides sixty days’ written notice prior to the
         expiration of the initial term or each successive renewal term. The employment agreements provide Messrs. Silverman and Dillon with a minimum base
         salary of $         and $         , respectively, which will be reviewed for increase no less frequently than annually. Both employment agreements also
         provide the executives with a discretionary annual bonus on the achievement of objective performance criteria, with a target annual bonus equal to       %
         of their annual base salary.

                Messrs. Silverman’s and Dillon’s agreements provide for severance benefits payable in the event of their termination under certain circumstances,
         subject to the execution of a general release of claims. If the executive’s employment is terminated without “cause,” or if he resigns for “good reason” (in
         either case as defined in their respective agreements), the executive will be paid severance in an amount equal to a multiple of the sum of the executive’s
         (i) annual base salary and (ii) target annual bonus (as in effect on the date of termination). The severance amount is payable in equal installments in
         accordance with our regular payroll practices over the 12-month period commencing on the sixtieth day after the termination date. For purposes of
         calculating the severance benefit, the multiple is one and one-half times for Mr. Silverman (three times if he is terminated prior to May 19, 2012) and two
         times for Mr. Dillon. Messrs. Silverman and Dillon are also eligible for continued participation in our health insurance plans, subject to their election of
         continuation benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and payment of the employee premium then in effect.
         In connection with a termination without “cause” or for “good reason,” or in the event of a termination by reason of death or disability, the executive will
         be eligible for a target bonus for the year of terminatio